UK government borrowing shows first annual fall since start of the pandemic

UK public sector borrowing showed its first annual fall since the start of the pandemic in April, dropping to £31.7 billion ($45.01bn) as parts of the economy reopened from a third lockdown.

Government borrowing was down from the £47.3bn registered in April last year when the first Covid-19 shutdown hammered the country’s public finances, according to the Office for National Statistics, however the figure was still the second highest for April since records began.

Covid pushes UK government borrowing to highest level since Second World War

Chancellor of the Exchequer Rishi Sunak said the government will continue its package of support to help businesses and workers “get back on their feet”.

"At the Budget, I set out the steps we are taking to keep the public finances on a sustainable footing by bringing debt under control over the medium term. But we also need to focus on driving a strong economic recovery from the pandemic," Mr Sunak said in a statement on Tuesday.

The government has spent heavily over the past year on job support and health measures to prop up the economy during the crisis and prevent unemployment from soaring out of control.

Borrowing in the 2020/21 financial year hit £300.3bn, or 14.3 per cent of annual economic output, the highest share on this measure since the end of the Second World War, but the figure was £2.8bn lower than an initial estimate a month ago.

While public sector net debt continued to creep up from 97.4 per cent of gross domestic product in March to 98.5 per cent in April, the £31.7bn was comfortably lower than the Office for Budget Responsibility’s forecast of £39bn.

Ruth Gregory, senior UK economist at Capital Economics, said the borrowing undershoot is likely to continue.

“April’s public finances figures showed that the government’s financial position isn’t as bad as the OBR predicted only two months ago, reinforcing our view that the tax hikes and spending cuts that most fear may be avoided,” said Ms Gregory.

The £300.3 bn borrowed (PSNB ex) in 2020/21 was nearly double that in 2009/10 at the height of the financial crises. Borrowing makes up the shortfall between spending by the government and other public sector organisations and its income such as taxes. https://t.co/3DPNoEVF87 pic.twitter.com/hLI0Bu6C9h
— Fraser Munro (@Fraser_ONS_PSF) May 25, 2021

Borrowing in 2021-22 is still expected to total more than £200bn, or 10 per cent of GDP, but whether Mr Sunak can deliver on his pledge to balance day-to-day spending and revenue by the middle of the decade without further tax increases will depend on the cost of future spending related to the virus.

The economy has already shown signs of a strong rebound, with business activity in the country hitting its highest level on record in May and retails sales soaring 9.2 per cent in April as consumers splurged some of their lockdown savings.

However, while parts of the economy are in recovery, many workers remain on the furlough scheme as some businesses struggle to hit pre-pandemic levels of activity.

“The estimated £93bn worth of Covid-19 government support in 2021/22 should keep public borrowing elevated in 2021/22,” said Ms Gregory.

“But we have been saying since the end of last year that rapid economic growth would quickly improve the outlook for the public finances. That means the Chancellor may be spared having to implement his proposed tax hikes/spending cuts before the 2024 general election.”

While tax receipts rose 7 per cent in April from a year earlier, they were still lower at £58bn, down from the £66.3bn recorded in March. Meanwhile, government spending, including capital investment, was down almost 12 per cent.

Danni Hewson, financial analyst at AJ Bell, said there were glimmers of good news in the day’s government borrowing figures.

"As the country heads to another ‘new normal’ people are getting back in the car again and back to the business of buying houses. Fuel Duty was up by more than a third compared to the same time last year as the first lockdown began," she said.

However, Ms Hewson said concerns remain as government borrowing was higher in April than it was in March when it hit £28bn, with measures like the government's furlough scheme continuing to support businesses and the recovery still in the early stages.

"Consumer confidence that’s been boosting spending and investor sentiment will be shaken by news of new guidance for some areas seeing a high level of cases of the Indian Covid variant," Ms Hewson said.

"Yes, recovery is fragile, and clarity is vital if it’s not to be derailed.”

UK government borrowing shows first annual fall since start of the pandemic

Public sector debt dropped to £31.7bn in April from £47.3bn a year earlier