British borrowing improves ahead of budget

LONDON – UK government borrowing fell by more than expected in September but remains elevated due to Covid-related spending, official data showed Thursday ahead of next week’s budget announcement.

Finance minister Rishi Sunak welcomed the upbeat news as he prepares to deliver his tax and spend plans on Wednesday.

Public sector net borrowing slid to £21.8 billion ($30.1 billion, 25.8 billion euros) last month, the Office for National Statistics said in a statement.

The improvement was driven by falling Covid-related expenditure and rising tax receipts as the economy starts to recover.

The monthly borrowing was nevertheless the second highest level for September since records began, after £28.8 billion in the same month one year earlier.

– Recovery ‘well underway’ –

“Our recovery is well underway… but the pandemic has had a huge impact on our economy and caused our debt levels to rise,” Sunak said.

“At the budget and spending review next week I will set out how we will continue to support public services, businesses and jobs while keeping our public finances fit for the future.”

The British economy rebounded in August despite ongoing supply chain woes and labour shortages, after shrinking slightly in July.

The ONS added Thursday that state interest payments hit £4.8 billion in September as soaring inflation bites.

The payments matched the level from a year ago despite lower borrowing, as interest rates are linked to inflation.

A recent spike in government bond yields is meanwhile expected to push repayments even higher in the coming months.

Sunak, whose official title is chancellor of the exchequer, will take comfort from the data but is not expected to deliver giveaways next week.

“September’s public finances figures mean that the chancellor will be able to boast in next Wednesday’s budget that he has reduced government borrowing much quicker than expected,” said economist Paul Dales at research consultancy Capital Economics.

He forecast Sunak would have to revise up his figures as a result of high interest payments and bond yields.

“We estimate these influences will add £10 billion to the … forecasts of the government’s debt servicing costs in both 2021/22 and in 2022/23,” added Dales.

British public finances have been been heavily impacted by emergency Covid-19 measures, in particular a furlough scheme which paid the bulk of private sector wages for millions of UK workers but ended last month.

Prime Minister Boris Johnson’s government has already announced taxation hikes that are unpopular within his Conservative party.

– Higher taxes on way –

Sunak in March ramped up tax on company profits to 25 percent in 2023, from 19 percent currently.

And Johnson last month broke an election pledge as he lifted national insurance tax, paid by workers and employers, under plans to fund social care for the elderly.

More tax hikes could now be in the pipeline to foot the bill for Covid, according to Interactive Investor analyst Victoria Scholar.

“Today’s figures will make it very difficult for Rishi Sunak to offer any giveaways at the upcoming budget next week, increasing the likelihood of higher taxes to pay for the billions of pounds of pandemic-era support measures,” Scholar noted.

The ONS also revealed that emergency pandemic support pushed borrowing to £319.9 billion in the financial year to March.

That was equivalent to 14.9 percent of gross domestic product, the highest level since the end of World War II.

Total government debt meanwhile stood at about £2.2 trillion at the end of September, or 95.5 percent of GDP.