The extent of the coronavirus toll on the UK public finances was exposed on Tuesday with official figures showing a record government cash deficit in the first quarter of the financial year, more than twice the previous highest level of borrowing.
Between April and June, the government’s net cash requirement — the deficit of tax receipts over public spending — was £174bn, far higher than both the £20.3bn in the same period of 2019-20 and the previous quarterly record of £76.8bn at the height of the global financial crisis in the fourth quarter of 2009.
The net cash requirement was higher in the second quarter alone than in any full financial year except 2009-10.
The Office for National Statistics, which released the figures, warned on Tuesday that users of public finances data should be wary of the headline borrowing numbers — public sector net borrowing — because they were based significantly on forecasts and liable to substantial revision.
Public sector net borrowing suggested lower borrowing than the cash figures, but it was also at a record in the quarter, £127.9bn between April and June; an increase of £103.9bn on the same months the previous year.
In response to the figures, Rishi Sunak, the chancellor, said the public finances would have been “far worse” had the government not taken unprecedented action to protect incomes during the Covid-19 lockdown.
“The best approach to ensure our public finances are sustainable in the medium-term is to minimise the economic scarring caused by the pandemic. Our plan for jobs does this by providing significant and targeted support where it’s needed the most, to ensure nobody is left without hope as we reopen our economy,” he said in a statement pledging to put the public finances on a sustainable footing again in the medium term.
A collapse in receipts flowing into the exchequer and a surge in spending led to the £174bn borrowing, which pushed public debt to 99.6 per cent of gross domestic product.
Tax paid to the government in the first three months of the 2020-21 financial year was £90.4bn, a 35 per cent decline on the £139bn paid in the same three months of 2019-20.
Part of the decline was exaggerated by a collapse in value added tax revenues because companies have been able to defer tax payments.
VAT revenue fell from £32.1bn last year to minus £0.4bn this year as the exchequer paid out more in rebates than it collected in tax payments. Companies will be expected to pay their deferred VAT bills before the end of March 2021, which will add to pressure on corporate finances as the economy recovers from coronavirus.
Net departmental public expenditure rose at an annual rate of 53.6 per cent to reach £254.6bn between April and June compared with £165.7bn in the same months last financial year.
This year’s figure included £24bn for the government’s furlough scheme and £7.4bn for the self-employed income support scheme over the first three months.
None of the borrowing figures include the money lent to companies through the various government and Bank of England schemes, which will add to the deficit once estimates of default rates are made later in the year.
Alongside the extremely high levels of borrowing, some economists pointed to some brighter spots for the government’s deficit. The monthly profile of borrowing was slowing down, Kallum Pickering, UK economist at Berenberg Bank said, with the June monthly figures showing 20 per cent lower borrowing than in May.
This, he said was caused by an improvement in economic activity in the June, reflecting evidence that “the downturn probably bottomed-out in early May”.
The monthly profile for the public sector net cash requirement was also slightly better than the Office for Budget Responsibility forecast for the same months, with a cash requirement of £43.1bn in June compared with the expected £52.6bn.
There is little doubt that government borrowing is set for a record this year and economists generally believe that Mr Sunak is likely to roll out further measures to support the economy later this financial year.
Samuel Tombs, UK economist at consultancy Pantheon Macroeconomics, said: “Borrowing probably will top 20 per cent of GDP this fiscal year if, as we expect, the chancellor dispenses more funds in the autumn Budget to reinvigorate the economy”.