Is it too late to save the economy?

By Darwin Friend, policy analyst


The chancellor has some last-minute reading to do before delivering tomorrow’s spring statement. That’s because this morning the Office for National Statistics (ONS) released the most recent statistics on the UK’s public sector finances. They illustrate the British economy’s recovery from the coronavirus, but also demonstrate the impact inflation is having and why we need an economic revival focused on growth and investment. 


As the figures show, borrowing dropped significantly over the year to February 2022. This is a clear demonstration of the UK’s economic recovery from the pandemic. However, the Treasury mustn't be complacent. Borrowing almost £140 billion in a single year is the third-highest since monthly records began. Simply put, this is unsustainable.


An even more concerning sign is the monthly borrowing figures. While the UK borrowed £2.4 billion less this February compared to the previous year, it was still £12.8 billion more than before the pandemic in February 2020. Public sector net borrowing (excluding public sector banks) was £13.1 billion in February 2022, the second-highest February borrowing since monthly records began in 1993.


The reason for the government to grapple with how much it’s borrowing cannot be better illustrated than by the debt figures in this release. It stands at over £2.3 trillion, an increase of over £197 billion from last year. That’s almost 95 per cent of GDP, the largest since 1962-63. Why does this matter? Because of the interest payments on that debt. 


It should come as little surprise, given the size of public sector debt combined with rising inflation, that last month’s debt interest payments were the highest for February on record at £8.2 billion. That's over £8 billion which could have been used to fund public services or cut the tax burden. Worryingly this figure is only going up. In a single year, it increased by over 50 per cent, or £2.8 billion, from February 2021. Failure to get a hold of the debt mound and spiralling inflation will see even more funds which should be used to pay for the public's priorities syphoned off to cover the cost of interest payments.


Debt interest wasn't the only area which cost more money. While the economy is recovering, central government bodies spent an extra billion pounds more in February 2022 compared to the same time last year, taking the total to more than £73 billion. This is despite costly schemes like furlough being wrapped up. Debt interest was a key part of this total increase in spending, as were procurement costs rising from £17 billion to £18.3 billion, alongside pay going up from £13 billion to £14.2 billion. Ministers must get a grip on spending if they want to restore balance to the public finances. This should be a key priority for the chancellor when he speaks tomorrow. 


It isn’t all doom and gloom though. Inflation may be increasing the amount the government spends, but it is also increasing the tax take. Receipts were £4 billion higher in February 2022 than the same month last year. This can form part of the justification for allowing the chancellor to scrap, or at the very least defer the national insurance rise. Importantly, it would allow taxpayers to keep more of their own money and ultimately stimulate growth, as our dynamic tax model shows.


These figures should draw Rishi’s attention to the fact that we aren’t out of the woods yet. The Spring Statement will need to offer taxpayers a respite from the tax burden while addressing the Gordian knot of excessive public sector spending. With spending rising, borrowing still at over £100 billion, and debt at a decades-long high, there needs to be a concerted effort to go for growth and tackle the colossal cost of covid. The simplest way to do this? By cutting taxes and pursuing sensible savings.

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