U.K. Budget Deficit Narrows to Almost Half of Pandemic Level
(Bloomberg) -- U.K. government borrowing in the first four months of the fiscal year was running at little more than half the level a year earlier as the economy returned to normality after months of restrictions.
The budget deficit stood at 78 billion pounds ($106 billion) between April and July, the Office for National Statistics said Friday. That compares with 139.7 billion pounds in the same period of 2020, when the economy was under siege from the coronavirus pandemic.
July alone saw the deficit narrow to just 10.4 billion pounds as self-employed workers made payments ahead of a tax deadline. The shortfall was smaller than economists forecast. Tax revenue surged by almost 16% from a year earlier, and spending fell 3.5%.
The overall improvement reflects a stronger-than-forecast recovery from the worst economic slump in 300 years. For the public finances, the pickup is translating into more tax revenue and less spending on pandemic support such as furlough payments.
That’s a boost for Chancellor of the Exchequer Rishi Sunak, who saw the budget deficit balloon to a peacetime high of over 14% of GDP in the 2020-21 fiscal year. It means borrowing this year could undershoot the 10.3% of GDP forecast by the fiscal watchdog, providing a positive backdrop for a review of departmental budgets later this year.
However, economists say tax rises are still inevitable if Sunak wants to deliver on his pledge to eliminate borrowing for day-to-day spending by the middle of the decade.
“Even if, as recent revisions to economic forecasts suggest, some of this improvement persists the coming Spending Review will still require some very difficult decisions and, most likely, more generous spending totals than currently pencilled in by the chancellor given the myriad pressures on public services and the benefit system following the pandemic,” said Isabel Stockton, research economist at the Institute for Fiscal Studies.
Debt-interest costs returned to more normal levels last month after they surged to record levels in June when higher inflation made it more expensive to service the quarter of government borrowing tied to the retail price index. But at 3.4 billion pounds in July, they were still up 46% on the year and higher than forecast by the Office for Budget Responsibility.
“Our recovery from the pandemic is well under way, boosted by the huge amount of support government has provided,” Sunak said in a statement. “But the last 18 months have had a huge impact on our economy and public finances, and many risks remain. We’re committed to keeping the public finances on a sustainable footing, which is why at the Budget in March I set out the steps we are taking to keep debt under control in the years to come.”
Support programs put in place to help people and businesses through the pandemic are due to end next month, including wage subsides for furloughed employees. The cost of furlough payments fell to a pandemic low of 1.36 billion pounds last month, when employers began to take over some of the burden from the government.
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