UK borrowing shows first annual fall since start of pandemic

British Pound Sterling banknotes are seen in a box at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017.REUTERS/Leonhard Foeger

By David Milliken, Andy Bruce

Britain’s massive public borrowing began to head downwards last month for the first time since the start of the COVID-19 pandemic, bolstered by a brightening economic outlook that pointed to a potentially faster improvement in public finances. Public sector net borrowing in April totalled 31.7 billion pounds ($44.9 billion), official figures showed on Tuesday, down from a record 47.3 billion pounds a year earlier when the government finances felt the greatest impact of the pandemic.

Britain’s government has spent heavily over the past year on health measures to limit the impact of COVID-19 as well as wage guarantees to stop unemployment rising significantly during the sharpest economic downturn in more than 300 years. Borrowing in the 2020/21 financial year was 300.3 billion pounds or 14.3% of annual economic output, the highest share on this measure since the end of World War Two but slightly below an initial estimate a month ago.

British government forecasters predicted in early March that borrowing would fall to 10.3% of GDP this financial year. However the growth outlook has improved since then thanks to a rapid roll-out of COVID vaccines, and monthly borrowing has come in below government predictions, prompting some economists to see a faster improvement in the public finances.

“The government’s financial position isn’t as bad as the Office for Budget Responsibility predicted only two months ago, reinforcing our view that the tax hikes and spending cuts that most fear may be avoided,” Capital Economics’s senior UK economist Ruth Gregory said. Public sector net debt as a share of GDP is at its highest since 1962 at 98.5%, equivalent to 2.171 trillion pounds and up from around 1.8 trillion pounds before the pandemic.

But unlike earlier decades, interest rates are far lower, reducing both debt servicing costs and the urgency to lower debt levels that previous governments felt. After the data, finance minister Rishi Sunak reiterated his plan “to keep the public finances on a sustainable footing by bringing debt under control over the medium term”, while supporting short-term growth. Accountancy firm KPMG said revenue from corporation tax fell to the lowest in a year in April, which it linked to a temporary ‘super-deduction’ designed to boost growth by giving businesses tax credits worth 130% of new investment in plant and machinery.

Source: Reuters