UK public finances see rare recent improvement in August

UK public finances saw a rare recent improvement in August as the budget deficit (measured in terms of PSNBex) dipped modestly to £6.4 billion from £6.9bn in August 2018, according to EY ITEM Club.

UK public finances see rare recent improvement in August

This deficit dip followed weakened performances in each of the first four months of fiscal year 2019/20 (April-July).

However, August’s slight improvement failed to make significant inroads into the markedly weakened public finance performance over the first five months of fiscal year 2019/20. (April-August).

PSNBex amounted to £31.1bn over the first five months of fiscal year 2019/20 up 27.9% from £24.4bn during April-August 2018.

The Office for National Statistics (ONS) incorporated changes in the way it treats student loans into the public finances. This reflected the fact that around half of them are not expected to be repaid.

ONS added £12.4bn to PSNBex in fiscal year 2018/19. Along with other revisions, PSNBex in 2018/19 was marked up to £41.4bn, 1.9% of GDP, from £23.6bn, 1.1% of GDP.

While the changed treatment of student loans affects the headline figures, it does not change the underlying story that government borrowing was already set to rise markedly in 2019/20 from 2018/19 and to overshoot the OBR’s full-year forecast for 2019/20 by a sizeable margin.

In the spring statement, the budget deficit (PSNBex) was forecast to rise to £29.3bn in 2019/20, although this did not include the student loan adjustment. On the basis of April-August and including the student loan adjustment, it is headed for £52.9bn, although it must be taken into account that the public finance data can be prone to significant revisions as well as being influenced by specific factors.

Much will depend on whether the economy can shrug off its current weakness as well as on Brexit developments.

The budget deficit was limited in August by government spending edging up just 0.3% year-on-year. This was helped by markedly lower debt interest payments.

There was a reasonable rise of 3.4% year-on-year in August in government receipts. Tax revenues in August were decent despite general evidence that the economy is currently struggling. The best performance saw income and capital gains tax receipts rising 5.0% year-on-year which has been helped by recent record-high employment and improved earnings growth.

The budget deficit in 2020/21 is set to be lifted appreciably by the £13.8bn increase in public spending (4.1% in real terms, the fastest increase in 15 years) announced by chancellor Sajid Javid in the spending review held earlier this month.

Significantly, the spending review was only for one year and not the normal three and for the time being, Javid is sticking to the current fiscal rules that were set out by the previous chancellor Philip Hammond.

It could well be that Javid will decide to set out new fiscal rules in his first Budget that move the goalposts and give greater scope for tax cuts and future spending plans

A key factor in all future fiscal developments is what will happen on the Brexit front comes on October 31st.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “The public finances measured in terms of Public Sector Net Borrowing excluding Banks (PSNBex) saw modest year-on-year improvement in August; this was the first improvement in the first five months of fiscal year 2019/20. Specifically, PSNBex saw a shortfall of £6.4bn in August compared to a deficit of £6.9bn a year earlier.

“This followed a reduced surplus of just £820bn in July (down from £2.5bn in July 2018). July is typically a month where the public finances are in surplus, given that it sees many medium-sized and large companies (as well as oil and gas firms) make corporation tax payments, while the second payment on account for self-assessment liabilities is also due.”

He added: “Over the first five months of fiscal year 2019/20 (April-August), borrowing totalled £31.1bn, up £6.8bn, or 27.9%, on the shortfall of £24.4bn over April-August 2018. In the Spring Statement, the budget deficit (PSNBex) was forecast to rise to £29.3bnn in 2019/20 (although this did not include the student loan adjustment).

“On the basis of April-August and including the student loan adjustment, it is headed for £52.9bn – although it must be taken into account that the public finance data can be prone to significant revisions as well as being influenced by specific factors. Much will depend on whether the economy can shrug off its current weakness as well as on Brexit developments. Central government receipts were up 3.4% year-on-year in August.”

Mr Archer also said: “Tax revenues in August were reasonable, despite general evidence that the economy is currently struggling. The best performance saw income and capital gains tax receipts rising 5.0% year-on-year which has been helped by recent record-high employment and improved earnings growth (annual average earnings growth reached an 11-year high of 4.0% in the three months to August).

“Additionally, corporation tax receipts rose 2.7% year-on-year in August while VAT receipts were up 3.0% Meanwhile, there was an increase of just 0.3% year-on-year increase in central government expenditure in August. This was helped by a 20.2% year-on-year drop in debt interest payments to £3.7bn. Over the first five months of fiscal year 2019/20, central government receipts were up 2.1% year-on-year while expenditure was up 3.7% year-on-year.”

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