Manifesto-breaching tax rise does not mean the end of the financial challenges facing the Chancellor in the run up to the Autumn Budget and three-year Spending Review on 27 October.
The public sector finances for August 2021 released on Tuesday 21 September reported a monthly deficit of £20.5bn, better than the £26.0bn reported for August 2020 but still much higher than the deficit of £5.2bn reported for August 2019. This brings the cumulative deficit for the first five months of the financial year to £93.8bn compared with £182.7bn last year and £27.2bn two years ago.
The Office for National Statistics revised the reported deficit for the year ended 31 March 2021 up by £27.1bn from £298.0bn to £325.1bn, principally as a consequence of recognising an estimated £21bn in bad debts on coronavirus loans to businesses.
Public sector net debt increased from £2,201.5bn at the end of July to £2,202.9bn or 97.6% of GDP at the end of August. This is £67.1bn higher than at the start of the financial year and a £416.8bn increase over March 2020.
As in previous months this financial year, the deficit came in below the official forecast for 2021-22 prepared by the Office for Budget Responsibility, which is likely to reduce its projected deficit of £234bn for the full year when it updates its forecasts for the Autumn Budget and Spending Review on 27 October.
Cumulative receipts in the first five months of the 2021-22 financial year amounted to £347.1bn, £48.4bn or 16% higher than a year previously, but only £12.4bn or 4% above the level seen a year before in 2019-20. At the same time cumulative expenditure excluding interest of £391.8bn was £39.9bn or 9% lower than the first five months of 2020-21, but £69.2bn or 21% higher than the same period two years ago.
Interest amounted to £30.8bn in the five months to August 2021, £10.7bn or 53% higher than the same period in 2020-21. This was principally because of the effect of higher inflation on index linked gilts. Despite the much higher levels of debt than two years ago, interest costs were only £3.8bn or 14% higher than the equivalent five months ended 31 August 2019.
Cumulative net public sector investment in the five months to August 2021 was £18.3bn, including £0.6bn in estimated bad debts on coronavirus lending in the current financial year. This was £11.3bn less than last year’s £29.6bn for the five months to August 2020, which included £15.6bn for coronavirus lending that is not expected to be recovered. Investment was £6.0bn or 49% more than two years ago, principally reflecting a higher level of capital expenditure.
Debt increased by £67.1bn since the start of the financial year, £26.7bn less than the deficit as tax receipts deferred last year were collected and coronavirus loans were repaid.
Alison Ring, ICAEW Public Sector Director, said: “Today’s numbers from the ONS illustrate the significant financial challenges facing the Chancellor as he puts together next month’s Budget and three-year Spending Review while public sector net debt hovers at almost 100% of GDP. The additional billion pounds a month the Chancellor expects to generate from the new tax and social care levy from next April needs to be seen in the context of the £20.5bn shortfall in the public finances recorded in the past month alone.
“Meanwhile, the belated recognition of £21bn in bad debts from coronavirus lending is a reminder of the scale of support the government has provided to keep the economy going during the pandemic. The risk for the next few months is that higher-than-expected inflation, shortages on shelves and disruptions in gas and energy markets may push the post-pandemic economic recovery off course and require further interventions, making the challenge of repairing the public finances even greater than it already is.”
Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.
The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for April 2021 from £26.0bn to £25.8bn, for May 2021 from £20.2bn to £19.8bn, for June 2021 from £21.4bn to £20.7bn and for July 2021 from £10.4bn to £7.0bn. The deficit for the twelve months ended 31 March 2021 was revised up from £298.0bn to £325.1bn.