by Scott Simmonds, researcher
Today’s Office for National Statistics (ONS) release of the public sector finances reveals the financial impact a year of coronavirus has had on public sector borrowing. With an opening of the economy almost within reach, government borrowing remains at near-record highs.
Here are some key highlights:
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Public sector net debt (excluding public sector banks) reached £2,195.8 billion at the end of May 2021 - equivalent to 99.2 per cent of GDP. This is the highest debt-to-GDP ratio since March 1962, and debt will soon surpass the size of the economy itself.
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Public sector net debt has almost tripled since 2006-07. Public sector debt in the financial year 2006-07 equated to 33.4 per cent of GDP, in May 2020-21 it now stands at 99.2 per cent.
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The ONS estimates that public sector net borrowing in 2020-21 reached £299.2 billion (equivalent to 14.3 per cent of UK GDP). This amount was revised down by £1.1 billion from last month’s estimates, but still remains the highest government borrowing since records began in 1946.
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The government borrowed £24.3 billion in May 2021 - the second highest May borrowing on record. May 2021 borrowing was £19.4 billion less than in May 2020, but still £18.9 billion more than in May 2019.
- Interest payments on central government debt were £4.3 billion in May 2021. This is a £0.9 billion (or 26 per cent) increase from May 2020.
Despite coming in £4.2 billion under the OBR economic and fiscal outlook at £24.3 billion, May 2021 was still the second-highest May borrowing on record. This amount contributed to public sector debt reaching almost £2.2 trillion at the end of May 2021, an increase of £259.1 billion on the same period last year.
Some people may argue that with borrowing costs at such low levels, the government should continue to borrow to invest. While it’s true interest rates are low for the moment, relying on rates staying low may prove costly. Recent ONS figures show that inflation has risen sharply to 2.1% in May 2021 after being as low as 0.7% in February 2021.
If inflationary pressures continue to rise, interest rates may not stay so low for long. A stress test by Treasury officials late last year found that if government borrowing was to increase to 1 per cent, this would increase government borrowing costs by between £30 billion and £40 billion a year. Government debt interest in May 2021 alone cost the taxpayer £4.3 billion - the same amount the government received in business rates, fuel duty, and custom duties combined.
With the November spending review on the horizon, the government should be looking to cut borrowing and save to spend. It’s worth remembering that current borrowing and spending was only possible because repairs to the economy were performed after the 2008 financial crisis. The crisis today, and the borrowing that has come with it, have dwarfed even that.
With the Coronavirus Job Retention Scheme and the Self Employment Income Support Scheme costing £10.4 billion (currently scheduled to end in September), winding down these covid measures will begin to bring costs down. But with government debt almost tripling in 15 years, more significant savings will have to be found to reduce borrowing and debt.
Our Save to Spend paper has identified 15 areas where saving could be found, totalling £43 billion this year. One of these calls for scrapping national pay bargaining in the public sector, meaning local living costs are better reflected in pay deals, with our research estimating a potential £8 billion saving. With central government expenditure on pay increasing 10.6 per cent in the 2020-2021 compared with the same period a year earlier, this is one of many areas that could be looked at.
Rather than finding new ways to spend taxpayers’ money, the government should be looking to make savings first.