Today has brought the UK public-sector finances into focus and we find some better news which is very welcome in these times. I was going to type good but as you will soon see the numbers remain somewhat eye-watering. Let me illustrate with the opening paragraph from this morning’s release.
Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in June 2020 is estimated to have been £35.5 billion, roughly five times (or £28.3 billion more) that in June 2019 and the third highest borrowing in any month on record (records began in 1993).
We can’t call that good when we were pre pandemic thinking of borrowing that sort of amount in the whole year. But it represents a slowing on the pandemic trend which is reinforced by this from May.
Borrowing estimates are subject to greater than usual uncertainty; borrowing in May 2020 was revised down by £9.8 billion to £45.5 billion, largely because of stronger than previously estimated tax receipts and National Insurance contributions
The better news theme continues with two nuances. The first is simply welcoming a lower number and the second is the strong hint that the economy was doing better than so far thought via stronger tax receipts. So I dug a little deeper.
Central government tax receipts and NICs for May 2020 have been increased by £6.6 billion and £2.3 billion respectively compared with those published in our previous bulletin (published 19 June 2020). Previous estimates of Pay As You Earn (PAYE) Income Tax increased by £4.2 billion and Value Added Tax (VAT) increased by £2.3 billion, both because of updated data.
This is outright good news as we see that both income taxes and expenditure or consumption taxes are better than previously thought. For overseas readers National Insurance Contributions can be confusing as they are presented as everything they are not. For example they hint they are for pensions and the like when in fact they just go in a common pot, and they give the impression they are not income taxes when they are.
Oh and something else we have been noting was in play.
Alcohol duty collected in May has increased by £0.5 billion (on a national accounts basis) compared with our previous estimate. A large proportion of this additional revenue relates to repayment of arrears of duty payments (or debt) from February, March and April 2020.
Perhaps whoever was collecting those numbers had been having a drink themselves….
This pandemic has reminded us that they are not what you might expect.
To estimate borrowing, tax receipts and NICs are recorded on an accrued (or national accounts) rather than on a cash receipt basis. In other words, we attempt to record receipts at the point where the liability arose, rather than when the tax is actually paid.
In a modern online IT area that seems poor to me. But it gets worse as we note my first rule of OBR club which for newer readers is that it is always wrong.
This process means many receipts are provisional for the latest period(s) as they depend on both actual cash payments and on projections of future tax receipts (currently based on the Office for Budget Responsibility’s (OBR’s) Coronavirus Reference Scenario ( 14 May 2020) , which are “accrued” (or time adjusted) back to the current month(s)).
So as usual we see that in May the OBR was wrong.
After noting the above please take this with a pinch of salt.
In June 2020, central government receipts are estimated to have fallen by 16.5% compared with June 2019 to £49.4 billion, including £35.0 billion in taxes…..This month, tax revenue on a national accounts basis fell by 20.1% compared with June last year, with Value Added Tax (VAT), Corporation Tax and Pay As You Earn (PAYE) Income Tax receipts falling by 45.1%, 19.2% and 1.6% respectively.
Hopefully they have learned something from the May experience. There is some hope from this although surely it should also apply to NICs?
However, we have applied an additional adjustment to PAYE Income Tax and Air Passenger Duty (APD).
There are a couple of extra points to note from the detail. For example they expect Stamp Duty on property to be £600 million as opposed to £900 million last June which gives us some more data on the property market. Also in the light of the upwards revision to alcohol duty I am a bit surprised they expect less this June ( £200 million lower) but £100 million more from tobacco.
We are spending much more.
In June 2020, central government spent £80.5 billion, an increase of 24.8% on June 2019.
There was also quite a win from reporting lower inflation levels.
Interest payments on the government’s outstanding debt in June 2020 were £2.7 billion, a £4.6 billion decrease compared with June 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.
We get some from this.
Borrowing in the first quarter of this financial year is estimated to have been £127.9 billion, £103.9 billion more than in the same period last year and the highest borrowing in any April to June period on record (records began in 1993), with each of the months from April to June being records.
We only get some written detail.
This unprecedented increase largely reflects the impact of the pandemic on the public finances, with the furlough schemes (CJRS and SEISS) adding £37.6 billion in borrowing alone as subsidies paid by central government to the private sector.
So let me help out a bit. Income taxes are only a little bit down on last year but VAT receipts are £10.8 billion lower which means there has been some saving going on. Fuel Duty is unsurprisingly some £3.2 billion lower and Stamp Duty some £1.2 billion lower.
One matter I would note is that expenditure on debt is down substantially by some £5.6 billion and I would caution about putting it all down to lower inflation and inflation ( RPI) linked Gilts. We have begun to issue the occasional Gilt at negative yields and others for little or nothing which will add to this. It is a development which I think only we have had on our radar which is that whilst we are issuing so much debt it is at only a small annual cost. By the way this is another area which the OBR has got spectacularly wrong and confirmed my first rule about them one more time.
So we learn that the UK economy has been doing better than previously reported as one of the signals is tax receipts. However, that is relative and one could easily type less badly. Moving onto the National Debt I have to confess I had a wry smile.
At the end of June 2020, the amount of money owed by the public sector to the private sector was just under £2.0 trillion (or £1,983.8 billion), which equates to 99.6% of gross domestic product (GDP).
So I was both right and wrong in awarding myself a slice of humble pie last month. Right in that unless you can prove the numbers are wrong you take it on the chin. But on the other side I was in fact more accurate than the Office for National Statistics in expecting the breaching of the 100% threshold to take longer. Also my first rule of OBR Club won again. Oh well! As Fleetwood Mac sang.
Another matter of note is how the Bank of England is affecting these numbers which is two ways. It has inflated how we record the debt.
If we were to remove the temporary debt impact of APF and Term Funding Scheme, public sector net debt excluding public sector banks (PSND ex) at the end of June 2020 would reduce by £192.9 billion (or 9.7% percentage points of GDP) to £1,790.9 billion (or 89.9% of GDP).
However all its purchases ( another £3.45 billion today) mean that we are borrowing very cheaply with some bond yields negative ( out to 6/7 years) and even the fifty-year being only 0.53%.