UK government borrows more than expected in July
High levels of inflation will ensure a large overrun in government borrowing this year, economists said on Friday, as the deficit was again higher than expected in July
Although Britain’s public finances improved in July after a particularly weak reading in June, data from the Office for National Statistics was still much worse than the fiscal watchdog had forecast for the month.
The figures will put further pressure on Conservative leadership candidates Liz Truss and Rishi Sunak to explain how they will fund their plans for big tax cuts as public finances deteriorate.
Public sector net borrowing was £4.9bn last month, an improvement of £800m from July 2021 and much better than the £20.9bn deficit in June, according to the ONS.
But the drop between June and July was expected because the government had no big debt interest bills to pay last month, and the level of borrowing was still £4.7bn higher than it was. that the Office for Budget Responsibility, the spending watchdog, had planned for the month.
Martin Beck, chief economic adviser at the EY Item Club, said the government was set to continue to miss the OBR’s forecast for the rest of the financial year, which ends next March. “This likely reflects the slowdown in economic activity in the first half of 2022, while on the expenditure side, the impact of much higher than expected inflation on debt interest payments was key,” he said. he declared.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the OBR’s forecast of £99bn in government borrowing in 2022-23 would need to be revised up to £150bn, mainly reflecting the higher cost of debt linked to inflation.
He also noted that the current inflationary spurt would not do much to swell state coffers as it was the “bad guy” for public finances as food is subject to a zero VAT rate. and the consumption of electricity and natural gas only incurs a rate of 5%. VAT.
“As a result, the reallocation of household spending from other goods and services towards food and energy will act as a drag on overall tax revenue,” Tombs said.
Ministers will be relieved that tax revenues held up well in July, with the government collecting £78.2billion in revenue during the month, up £6.1billion from a year earlier. But Chancellor Nadhim Zahawi acknowledged that high inflation “puts pressure on public finances by increasing the amount we spend on debt interest”.
The Treasury warned that there was not much comfort in taking July’s numbers stronger than June’s because in a time of high inflation there would be significant volatility in the monthly data.
Alison Ring, Director of Public Sector and Taxation for the Institute of Chartered Accountants in England and Wales, said: “The UK’s deteriorating fiscal situation will make it difficult for the new Prime Minister to deliver on promised tax cuts, invest in energy resilience and support struggling families and businesses through the winter without breaching the fiscal rules designed to ensure the long-term health of public finances.”
Both Truss and Sunak have pledged an emergency budget to flesh out the energy price support and tax cuts they will offer soon after either of them is elected as Premier British minister.
Sunak’s leadership campaign said the public finance figures underscore “why controlling inflation must be the priority.”
“The figures show that inflation slows down the economy and increases the deficit. Permanent, unfunded tax cuts now would make both of these problems worse,” a spokesperson said.
Treasury and OBR officials have indicated they would be prepared to provide new medium-term forecasts to inform any emergency budget, which will prove uncomfortable to read if independent economists’ forecasts for public finances are an accurate guide to budget watchdog thinking. .
Additional reporting by Sebastian Payne