UK government borrowing falls as economy reopens
- UK government borrowing fell year-on-year during June 2021 as the UK economy reopens.
- UK public services face GBP 17 billion cuts.
- Supply chains are under pressure due to the ‘pingdemic’.
- British Chamber of Commerce update reveals strong UK GDP growth in April 2021.
- FTSE 100 rebounds as global markets recover.
UK government borrowing, the shortfall between public spending and tax income, fell year-on-year during June 2021 following the reopening of the UK economy. Recent figures reveal that UK government borrowing stood at GBP 22.8 billion in June 2021, GBP 5.5 billion below June 2020. Despite the reduction, the latest figure is the second-highest June borrowing figure since records began.
UK borrowing levels hit record highs during the coronavirus pandemic, with billions spent on support measures such as the furlough scheme. The dramatic rise in borrowing has pushed UK government debt to over GBP 2.2 trillion, equating to 99.7% gross domestic product (GDP), the highest figure since the early 1960s.
The Institute for Fiscal Studies (IFS) says the recent lower than anticipated borrowing was likely to be temporary, meaning UK Chancellor Rishi Sunak will be restricted during the upcoming Autumn spending review.
According to The Office for National Statistics (ONS), the UK government borrowed a total of GBP 297.7 billion in the financial year to March 2021. This figure was 14.2% of the UK’s GDP and became the highest borrowing costs since the end of World War Two.
The ONS confirmed that the cost of UK government support measures throughout the coronavirus pandemic meant day-to-day government spending increased by GBP 204.3 billion to GBP 942.7 billion in the last year.
The reason for the fluctuation in debt interest was primarily down to an increase in retail prices, which has contributed to a sharp rise in UK inflation over the past two months, surpassing the Bank of England’s (BoE) 2% target rate.
Concerning the recent figures, Mr Sunak said he was proud of the UK government’s support measures which helped protect jobs and provide financial security to thousands of UK businesses during the coronavirus pandemic.
However, the UK chancellor also said that UK debt must remain under control hence the stringent policies implemented during the Spring 2021 budget to help UK finances become more sustainable.
The IFS stated that Mr Sunak’s tough financial choices would continue despite the strong recovery of the UK economy, which is advancing more quickly than anticipated in March 2021. The IFS has now forecast that UK government borrowing in 2021/22 could be GBP 30 billion under the GBP 234 billion predicted during the March 2021 budget.
The near-term improvement in borrowing figures is not expected to continue, with the coronavirus pandemic causing long standing economic damage to the UK, leaving the chancellor with very little headroom for potential spending increases.
UK public services face GBP 17 billion cuts
UK chancellor Rishi Sunak is expected to impose cuts to UK public services of up to GBP 17 billion compared to the UK government’s plans before the coronavirus pandemic.
The IFS said the UK government was on target to spend between GBP 14 billion and GBP 17 billion less annually on various public services from April 2022 than previously anticipated before Covid-19.
As Mr Sunak prepares the allocation of funds across UK government departments, IFS advised that the rising demands on UK public finances needed to be directly targeted.
The news follows reports that Mr Sunak was required to step back from the launch of the UK’s spending review as both he and UK Prime Minister Boris Johnson were forced to self-isolate following recent contact with the COVID-positive UK Health Secretary Sajid Javid.
The spending review was due to launch this week but will now be delayed when MPs return to the House of Commons in September 2021. However, preparations for the spending review were already underway and will continue throughout the summer.
In the IFS’ recent report, it was stated that Mr Sunak could be given a GBP 30 billion bonus from the Office for Budget Responsibility (OBR) to put towards UK public finances as the UK economy has recovered much sooner than previously thought.
The OBR had previously warned Mr Sunak that he would need to find an additional GBP 10 billion a year over the next three years to cover the costs of the UK government’s coronavirus support measures, including the NHS test-and-trace system and vaccination boosters.
Isabel Stockton, an economist at IFS, said increased spending to meet COVID cost pressures could require further spending cuts, tax hikes, or high borrowing levels.
The Treasury said it’s currently challenging to confirm monetary policy pressures as future departmental budgets are yet to be confirmed.
Supply chains are under pressure due to the ‘pingdemic’
Supply chains are feeling the pressure due to thousands being pinged by the NHS COVID app and being told to self-isolate. The ‘pingdemic’ is now severely impacting businesses, with staff shortages leading to significant delays.
Ports, in particular, are seeing substantial staff absences by as much as 10%, creating a knock-on effect for supply chains. The delays mean that there could be a significant lack of food on supermarket shelves.
Chief executive of the UK Major Ports Group Tim Morris said the ‘pingdemic’ was the most substantial threat to ports’ that has ever been experienced. Mr Morris said that unless the UK government intervenes, there will be a significant disruption to food supplies.
One in ten meat workers are currently being pinged by the NHS COVID app, prompting the industry to engage in discussions with the UK government requesting emergency exemption from self-isolation. So far, no deal has been announced.
The reports follow comments from UK Vaccines minister Nadim Zahawi who said UK citizens in critical roles would not need to self-isolate, such as air traffic controllers or train signallers.
High street stores such as Marks and Spencer have warned that shops may need to be closed earlier than usual as one in five staff members are being told to self-isolate via the NHS COVID app. Due to self-isolation, the lack of workers has led to fears that the UK economy could grind to a halt despite the arrival of Freedom Day last Monday, which saw a full lifting of COVID restrictions.
The news follows reports that 1.8 million people in the UK were pinged by the NHS COVID app last week alone, with 194,000 people testing positive for coronavirus.
Last weekend saw UK daily COVID infections surpass 50,000 for the first time since March 2021 as UK Health Secretary Sajid Javid stated that daily infections could soon rise to 100,000 a day.
British Chamber of Commerce update reveals strong UK GDP growth in April 2021
The recent monthly economic update from the British Chamber of Commerce reveals strong UK GDP growth during April 2021.
The UK economy expanded by 2.3% in April 2021, which is the most rapid growth seen since July 2020 and an increase of 2.1% from March 2021.
UK GDP rose by 1.5% in the three months to April 2021, with the UK economy currently benefiting from pent-up demand following the easing of COVID restrictions. The UK economy was also underpinned by the rapid vaccination rollout as well as the UK government’s solid financial support for workers and businesses.
The UK services sector, which covers three-quarters of UK economic output, expanded by 3.4% in April 2021, with customer-facing businesses rising by 12.7%. Productivity from accommodation services increased by 68.6 and 39% from hospitality as restaurants began offering outdoor dining.
Whilst UK inflation currently stands above the BoE’s target rate; it’s thought that current supply chain disruptions could drag figures back down towards the target in the near term.
FTSE 100 rebounds as global markets recover
The FTSE 100 took a tumble this week following the rise of UK COVID infections which dampened Freedom Day on 19th July 2021. However, now making its way back towards the 7,000-point mark, the FTSE 100 is up 108 points (1.5%) at 6,089, recovering the near GBP44 billion lost last Monday.
Joshua Mahony, a senior market analyst at IG, said that the strength of US stocks has filtered through to Europe, despite China attempting to undermine key commodity prices.
As a result, the FTSE 100 is today on track to see the best day since May, having recently experienced its worst day in two months.