Public borrowing falls but debt still at highest since the 1960s

Rishi in Treasury

Government borrowing fell last month as the economic recovery boosted tax revenues, official figures show, but national debt is still at the highest levels since the 1960s.

Public sector net borrowing, excluding public sector banks, fell by £19.4 billion year-on-year to £24.3 billion in May, the Office for National Statistics said. This was better than the £26 billion forecast by economists but still the second highest borrowing figure for May since monthly records began in 1993.

Although the government is still spending billions of pounds on the furlough schemes, the gradual reopening of the economy and falling unemployment helped to increase the tax intake. Central government receipts rose by £7.5 billion to just under £57 billion in the year to May.

This was above the Office for Budget Responsibility’s March forecast of £55.2 billion and was driven by higher VAT and income tax receipts, which were £1.8 billion and £0.8 billion higher than forecast.

At the same time government spending fell by almost £11 billion to just under £82 billion. This includes the £5.2 billion on job furlough schemes, just under half of which went on the coronavirus job retention scheme.

Rishi Sunak, the chancellor, said: “As we emerge from the pandemic, we are continuing to support people and businesses to get back on their feet, and our plan for jobs is working. It’s also important over the medium term to get the public finances on a sustainable footing. That’s why at the budget in March I set out the difficult but necessary steps we are taking to keep debt under control in the years to come.”

In his March 3 budget Sunak warned that he would start pushing through tax rises over the coming years to help manage the rising debt. The chancellor announced that from 2023 corporation tax would rise from 19 to 25 per cent for the most profitable companies, raising nearly £50 billion over the next five years.

He said that the basic rate and higher rate income tax thresholds would be frozen from next year, raising an additional £19.2 billion. The changes were estimated to increase the tax burden to 35 per cent of GDP, the highest level since the 1960s.

However, the outlook for the economy and, in turn, the public finances has improved since Britain began rolling out vaccines. Economists now think that the chancellor may be able to scrap the severe tax rises.

Thomas Pugh, economist at Capital Economics, said: “The scheduled £93 billion [4.1 per cent of GDP] worth of Covid-19 government support in 2021-22 should keep public borrowing elevated in 2021-22. But we have been saying since the end of last year that rapid economic growth would quickly improve the outlook for the public finances. That means the chancellor may be spared having to implement his proposed tax hikes/spending cuts before the 2024 general election.”

The Office for National Statistics said that the debt hit £2.19 trillion, or 99.2 per cent of GDP.

Samuel Tombs, economist at Pantheon Macroeconomics, said: “Public borrowing will continue to undershoot the OBR’s budget forecast, given that GDP in 2021 is likely to be about 3 per cent higher than it expected this year, which the OBR’s own rules of thumb suggest will depress borrowing in the 2020-2021, relative to its forecast, by about £30 billion.”

This will be partially offset by higher interest payments, because of rising inflation and the likelihood that the government will extend coronavirus-related health spending into next winter. “As a result, we look for a full-year deficit of about £210 billion in 2021-22.”