Wednesday 21 July 2021 8:32 am | Updated: Wednesday 21 July 2021 1:47 pm

Covid: Government borrowing falls in June

Government borrowing fell over the last month as the UK economy rapidly rebounds from the damage inflicted on it by Covid, new figures released today show.

The government borrowed £22.8bn last month, the second-highest figure for June since records began, according to the Office for National Statistics.

However, borrowing eased from May, down from £24.3bn and significantly over the last year – the government borrowed £5.5bn more in June 2020.

A sharp reduction in economic activity and lower tax receipts triggered by the pandemic has pushed borrowing up to eye-watering levels.

However, the faster than expected economic recovery has driven up tax receipts and has partly reduced the need for the government to spend to support the economy, causing a reduction in borrowing.

Analysts at KPMG highlighted that last month’s figure is still significantly higher than the pre-pandemic £6bn average for June.

Borrowing in June was less than the £25.2bn forecast by the Office for Budget Responsibility, the government’s spending watchdog. The figures also suggest borrowing for the entire year will be lower than the OBR’s £233.9bn prediction.

The government borrowed £15.8bn more compared to the same period in the year before the arrival of Covid, highlighting the strain the pandemic has put on the public finances.

The UK’s stock of debt reached over £2.2 trillion in June, representing 99.7 per cent of the entire economy, the highest debt to GDP ratio since March 1961.

Responding to the figures, chancellor Rishi Sunak said: “I’m proud of the unprecedented package of support we put in place to protect jobs and help thousands of businesses survive the pandemic, and that we are continuing to support those who need it.”

“However, it’s also right that we ensure debt remains under control in the medium term, and that’s why I made some tough choices at the last Budget to put the public finances on a sustainable path.”

Government revenues are recovering from the troughs of the pandemic, driven by households and businesses resuming normal levels of spending. The ONS said tax receipts rose 18 per cent annually to £62.2bn in June of this year.

Stamp duty receipts more than doubled over the last year as prospective homebuyers rushed to buy houses to capitalise on a tax holiday.

VAT receipts, a bellwether for consumer spending, gained 22.3 per cent annually, illustrating that demand remains strong in the economy.

Interest payments jump £6bn

The amount the government pays in interest to owners of public debt jumped sharply over the last year, fuelling concerns that the UK’s public finances are too exposed to inflationary risks.

In June 2021, the government paid £8.7bn in interest payments, the highest monthly figure since records began, compared to £2.7bn in the same period last year.

The increase was caused by a rise in the retail price index – a measure of price rises in the UK economy – triggering a surge in interest payments on inflation-linked debt.

Michal Stelmach, senior economist at KPMG UK, said: “The volatility of debt interest spending underscores its sensitivity not just to inflation but also to interest rates, which can rapidly change the path of fiscal sustainability.”

Latest figures from the ONS show inflation jumped 2.5 per cent annually in June, higher than the Bank of England’s target.

Impact on autumn budget

Strong tax revenues and spending could prompt the OBR to revise up its medium term forecast for the UK economy, analysts said in response to the borrowing figures.

The OBR currently expects economic scaring resulting from the pandemic to leave the economy three per cent smaller than it would have been if Covid had not happened.

However, the UK economy is growing faster than expected, which may give the chancellor more room to announce giveaways in the upcoming spending review and autumn budget.

Martin Beck, senior economic advisor to the EY Item Club, said: “Should the OBR scale back this estimate, then its forecast revisions could give the chancellor more policy flexibility in this autumn’s budget.”