UK public finances worsen as February borrowing hits record

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The UK public finances deteriorated further in February as spending on Covid-19 measures continued to grow while tax receipts fell.

The government spent more than it received in taxes and other income last month, requiring it to borrow £19.1bn, the highest February figure since records began in 1993, official data published on Friday showed.

Neil Birrell, chief investment officer at asset management group Premier Miton, said public sector borrowing in February was “a frightening number, although it was at the lower end of expectations”.

The figure from the Office for National Statistics was lower than the £21bn forecast by economists polled by Reuters and it means that borrowing could undershoot the figure for the full fiscal year forecast by the Office for Budget Responsibility, the independent fiscal watchdog.

Public borrowing in February reflected a £14.2bn annual increase in central government expenditure, including £3.9bn spent on coronavirus job support measures. Spending on interest payments also increased due to the rise in the retail price index, which boosted payouts on index-linked bonds.

Tax receipts fell £1.5bn in February compared with the same month last year as Covid-19 restrictions resulted in businesses remaining closed and limited consumer spending. The ONS reported notable falls in receipts from taxes such as value added tax, business rates and fuel duty.

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, noted that tax receipts had continued to “hold up relatively well”, given the lockdown, despite being flattered by the relatively high level of self-assessment income tax and capital gains tax receipts partially clocked up in the pre-virus period.

In the 11 months to February, net borrowing rose to an estimated £278.8bn, also the highest on record.

However, this is more than £76bn lower the £355bn forecast by the OBR, partially thanks to a significant downward revision of the figure for January.

The OBR figure includes an estimated £27.2bn in write-offs of business loans issued under the government’s coronavirus programmes, which are yet to be reflected in the ONS numbers.

But even removing the write-offs of business loans, borrowing for the full fiscal year could undershoot the OBR forecast — by about £20bn according to Thomas Pugh, UK economist at consultancy Capital Economics — unless there is a large surge in March.

The funding for government coronavirus support schemes, combined with reduced tax receipts and a fall in output, have pushed public sector net debt as a ratio of gross domestic product to levels last seen in the early 1960s, when fiscal consolidation was gradually reducing the high debt accumulated during the second world war.

Column chart of % of GDP, fiscal years showing UK public debt has reached a level last seen in the early 1960s

Public sector net debt in February was equivalent to 97.5 per cent of GDP. 

Rishi Sunak, chancellor, said the government’s support measures were the “responsible thing to do”, but that it was necessary to “return the public finances to a more sustainable path once the economy has recovered”.

In his March Budget, Sunak announced he planned to spend £93bn on virus-related support in 2021-2022, but that in the following years there would be large increases in corporation and income taxes.

On Thursday the Institute for Fiscal Studies, a think-tank, said most of the spending cuts implied by the budget were “simply unrealistic, and borrowing or taxes will be higher than planned”.

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