British public sector borrowing climbed to a record £214.9 billion ($284.89bn) in the first seven months of the fiscal year, as UK finance minister Rishi Sunak plans to announce a squeeze on public sector pay to help bring government spending under control.
The UK government borrowed £22.3bn in October alone, £10.8bn more than the same month a year ago, putting Britain on track for a deficit of £372.2bn by the end of March, according to data from the Office for National Statistics (ONS).
Meanwhile, retail sales rose 1.2 per cent in October on the month, the sixth monthly increase in a row, which took sales 6.8 per cent above their pre-crisis level.
Mr Sunak said the government has provided more than £200bn of support to protect the economy and people’s livelihoods “from the significant and far reaching impacts of coronavirus”.
“This is the responsible thing to do, but it’s also clear that over time it’s right we ensure the public finances are put on a sustainable path,” Mr Sunak said.
Mr Sunak will set out his spending review next week, giving details of how much money will be allocated to different departments, with analysts expecting him to make the case for pay restraints on public sector earnings.
A three-year pay freeze could save the government £23bn by 2023, or £15bn if National Health Service workers are not included, according to a report from the Centre for Policy Studies.
The UK’s borrowing figures so far this fiscal year are now £169.1bn more than in the same period last year and the highest public sector borrowing in any April to October period since records began in 1993.
This puts public debt as a share of gross domestic product at 100.8 per cent, however stronger growth in the economy in the third quarter meant this was down slightly from September's peak of 101.2 per cent, the highest level since the early 1960s.
Paul Dales, chief economist at Capital Economics, expects the second lockdown to cause a renewed rise in the pace of borrowing in the coming months. He expects “the deficit to reach about £420bn in 2020/21” – it’s highest level since the Second World War.
Meanwhile, despite the introduction of some local lockdowns in October, retail sales continued their run of strong growth, with ONS suggesting that some consumers brought forward their Christmas shopping ahead of a second nationwide lockdown this month.
However, the slow recovery in clothing sales stalled after five consecutive months of increased sales.
“The decent rise in retail sales in October and the smaller increase in government borrowing suggests that the economy held up better than expected when the Covid-19 tiered restrictions were being implemented,” said Paul Dales, chief UK economist at Capital Economics
“But the second lockdown that began in November will probably prompt retail sales to fall again and public borrowing to rise faster.”
Spending in department stores rose 3.1 per cent and the mini-housing boom continued to boost sales of household goods, which rose 3.2 per cent.
“There was also little evidence of the stockpiling that occurred before the first lockdown as the volume of food sold in October fell by 0.2 per cent month-on-month,” said Thomas Pugh, UK economist at Capital Economics.
“Internet sales will probably rise again in November, but the closure of all non-essential shops means that overall retail sales will probably fall.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, expects a 10-per-cent monthly decline for retail sales this month, far better than the 23-per-cent contraction seen in April. However, if restrictions are eased in December, he expects sales to "set a new peak".
The GfK measure of consumer confidence dropped from minus 31 in October to minus 33 in November, only a fraction above the low of minus 34 in April during the first lockdown.
Consumers have an especially negative outlook for the economy over the next year, with this balance staying at minus 50, only slightly better than the minus 57 reached in May.
Britain can currently borrow cheaply to fund its spending to contain the pandemic, due to low interest rates. However, the Bank of England has warned that some long-term economic damage or scarring is likely, and last month the International Monetary Fund said Britain would probably need to raise taxes after the pandemic to fill the gap.
However, Ruth Gregory of Capital Economics said with interest rates set to stay very low for the foreseeable future, “we don’t think that will cause an adverse reaction in the gilt market or require the government to raise taxes soon”.