Borrowing is falling but Sunak faces the most challenging situation for a chancellor in decades
During the last 17 months we have become almost inured to the terrifying increases in government borrowing incurred in grappling with the pandemic.
The government borrowed £303bn during the 2020-21 financial year, a peacetime record, equivalent to 14.5% of UK GDP.
Yet something interesting has been happening during the current financial year.
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In each of the first four months government borrowing, while still high, has come in significantly below the levels forecast by the independent Office for Budget Responsibility (OBR).
The latest figures for the public sector finances, published today, revealed that the government borrowed £10.4bn in July.
Make no mistake, this is still a terrifyingly high number, equivalent to borrowing of nearly £233,000 every minute.
It was, however, £10.1bn less than in July last year – and also significantly lower than the £11.8bn that City economists had been expecting.
The figure means that, during the first four months of the current financial year, the government borrowed £78bn – some £26bn less than the OBR had been forecasting at this stage.
There are a couple of key points to make about the numbers.
July’s figures are normally boosted by self-assessed tax returns
First of all, July is usually a strong month for tax receipts and therefore the public finances, because it is one of two months in the year – the other is January – in which the deadline falls due for payments by those completing self-assessed tax returns.
It was not unusual, pre-pandemic, for the government to record a surplus during July.
That appears to have been a key factor this month.
The government enjoyed tax receipts of £70bn during July – up £9.5bn on the same month last year.
Behind that was a £3.7bn improvement in self-assessed tax receipts on the same month last year, when HMRC allowed tax payments to be deferred, chiefly to support the self-employed.
But it probably also reflects that the economy is starting to recover.
VAT receipts were up by £1.2bn on July last year, fuel duty was up by £400m – partly reflecting higher petrol and diesel prices – and regular income tax payments were up by £800m.
There was also a big jump in stamp duty receipts, which at £1.4bn were double the level they were in July last year, reflecting a rush to beat the deadline for the end of the temporary £500,000 nil-rate band.
Fuel duty was up by £400m
Receipts from corporation tax, which is levied on company profits, also came in higher than the OBR had been expecting.
Secondly, government spending was lower, with the government shelling out £79.8bn during the month.
That was down £2.9bn on July last year and probably reflects that, not only did the government begin to taper away its furlough scheme, but also that there were fewer workers participating in the scheme.
Government spending on the furlough scheme during July was down £4.2bn on the same month last year while spending on the equivalent scheme for the self-employed was down £200m.
Worryingly, though, interest payments on the national debt came in at £3.4bn during the month – up £1.1bn on July last year.
As for the national debt, that stood at £2.216trn at the end of July, equivalent to 98.8% of GDP, which the Office for National Statistics (ONS) said was the highest it has been since March 1962.
The figures were welcomed by Rishi Sunak, the chancellor, who has been spelling out the need to restore order to the public finances.
He said: “Our recovery from the pandemic is well under way, boosted by the huge amount of support government has provided.
A rise in stamp duty receipts reflected a rush to complete deals before the winding down of a stamp duty holiday
“But the last 18 months have had a huge impact on our economy and public finances, and many risks remain.
“We’re committed to keeping the public finances on a sustainable footing, which is why at the budget in March I set out the steps we are taking to keep debt under control in the years to come.”
That is not to say the chancellor faces anything other than a major challenge on that front.
Isabel Stockton, research economist at the Institute for Fiscal Studies said: “Even if, as recent revisions to economic forecasts suggest, some of this improvement persists the coming Spending Review will still require some very difficult decisions and, most likely, more generous spending totals than currently pencilled in by the chancellor given the myriad pressures on public services and the benefit system following the pandemic.”
That is why the government sought to cut its overseas aid budget by £4bn – but that is a comparatively small sum in the context of overall government finances.
Elsewhere the government has committed to raise public spending by £55bn this year to help clear backlogs in the NHS and in the courts system.
Most economists believe the ultimate bill will be higher.
That is why the chancellor is dropping heavy hints that a rise in state pensions this year under the “triple lock” – whereby the benefit increases by the highest of 2.5%, inflation or average earnings – is not going to happen.
The government has committed to spending increases to clear NHS backlogs
Were the triple lock to apply, the state pension will have to match the rise in average earnings for May to July which, if as expected comes in at about 8% could cost the Treasury an extra £7bn a year.
Accordingly, Mr Sunak is arguing the lock should not apply.
He can reasonably point out that average earnings growth has been flattered by the fact that, a year ago, it was depressed by pay cuts, mass redundancies and the furlough scheme.
Yet the decision will be politically fraught.
The triple lock was a Conservative manifesto pledge and opinion polls suggest the public opposes scrapping it, even younger voters, despite the intergenerational unfairness implicit in the policy.
Mr Sunak is due already to announce the government’s three year Spending Review this autumn but there is also currently speculation in Westminster about the timing of the next budget.
Some Treasury officials would rather, it is said, have an early budget to nail down the government’s spending and taxation plans for the coming year in order to prevent the prime minister from making outlandish spending commitments ahead of the COP26 summit in November.
Others would prefer to postpone the budget until spring next year so the chancellor can better assess the strength of the recovery and the lasting damage done to the economy by the pandemic.
It is arguably the most challenging situation any chancellor has faced since, Labour’s Denis Healey in 1976
That happened last time when the budget was pushed back from autumn last year to March this year.
Making the chancellor’s job much harder would be an earlier than expected rise in interest rates.
This is due to the way the Bank of England’s asset purchase programme – quantitative easing in the jargon – works.
When the Bank buys a government bond, it credits the account of the seller, who effectively receives a deposit at the Bank.
These are known as “reserves” and the Bank pays interest on those reserves at Bank rate – currently 0.1%.
It means that the cost of QE rises if interest rates do.
All of this adds up to the most challenging situation any chancellor has faced since, arguably, Labour’s Denis Healey was forced in 1976 to seek a bail-out from the International Monetary Fund and possibly since the war.
A household energy supplier has failed, weeks after it attracted attention from regulators.
Rebel Energy, which has around 80,000 domestic customers and 10,000 others, had been the subject of a provisional order last month related to compliance with rules around renewable energy obligations.
The company’s website said it was “ceasing to trade” but gave no reason.
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Industry watchdog Ofgem said on Tuesday that those affected by Rebel’s demise did not need to take any action and would be “protected”.
Customers, Ofgem said, would soon be appointed a new provider under its supplier of last resort (SoLR) mechanism.
This was deployed widely in 2021 when dozens of energy suppliers collapsed while failing to get to grips with a spike in wholesale energy costs.
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The last supplier to go under was in July 2022.
Ofgem said new rules governing supplier business practices since then had bolstered resilience.
These include minimum capital requirements and the ringfencing of customer credit balances.
The exit from the market by Bedford-based Rebel was announced on the same day that the energy price cap rose again to take account of soaring wholesale costs between December and January.
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Tim Jarvis, director general for markets at Ofgem, said: “Rebel Energy customers do not need to worry, and I want to reassure them that they will not see any disruption to their energy supply, and any credit they may have on their accounts remains protected under Ofgem’s rules.
“We are working quickly to appoint new suppliers for all impacted customers. We’d advise customers not to try to switch supplier in the meantime, and a new supplier will be in touch in the coming weeks with further information.
“We have worked hard to improve the financial resilience of suppliers in recent years, implementing a series of rules to make sure they can weather unexpected shocks. But like any competitive market, some companies will still fail from time to time, and our priority is making sure consumers are protected if that happens.”
Harrods is urging lawyers acting for the largest group of survivors of abuse perpetrated by its former owner to reconsider plans to swallow a significant chunk of claimants’ compensation payouts in fees.
Sky News has learnt that KP Law, which is acting for hundreds of potential clients under the banner Justice for Harrods, is proposing to take up to 25% of compensation awards in exchange for handling their cases.
In many cases, that is likely to mean survivors foregoing sums worth of tens of thousands of pounds to KP Law, which says it is working for hundreds of people who suffered abuse committed by Mohamed al Fayed.
Mohamed al Fayed. File pic: PA
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Under a redress scheme outlined by the London-based department store on Monday, which confirmed earlier reports by Sky News, claimants will be eligible for general damages awards of up to £200,000, depending upon whether they agree to a psychiatric assessment arranged by Harrods.
In addition, other payments could take the maximum award to an individual under the scheme to £385,000.
A document published online names several law firms which have agreed to represent Mr al Fayed’s victims without absorbing any of their compensation payments.
KP Law is not among those firms.
Theoretically, if Justice for Harrods members are awarded compensation in excess of the sums proposed by the company, KP Law could stand to earn many millions of pounds from its share of the payouts.
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‘Many more’ likely abused by Fayed
A Harrods spokesperson told Sky News on Tuesday: “The purpose of the Harrods Redress Scheme is to offer financial and psychological support to those who choose to enter the scheme, rather than as a route to criminal justice.
“With a survivor-first approach, it has been designed by personal injury experts with the input of several legal firms currently representing survivors.
“Although Harrods tabled the scheme, control of the claim is in the hands of the survivors who can determine at any point to continue, challenge, opt out or seek alternative routes such as mediation or litigation.
“Our hope is that everyone receives 100% of the compensation awarded to them but we understand there is one exception among these law firms currently representing survivors who is proposing to take up to 25% of survivors’ compensation.
“We hope they will reconsider given we have already committed to paying reasonable legal costs.”
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Further claims against al Fayed
Responding to the publication of the scheme on Monday, KP Law criticised it as inadequate, saying it “does not go far enough to deliver the justice and accountability demanded by our clients”.
“This is not solely a question of compensation but about justice and exposing the systematic abuse and the many people who helped to operate it for the benefit of Mohamed al Fayed and others.”
Seeking to rebut the questions raised by Harrods about its fee structure, KP Law told Sky News: “KP Law is committed to supporting our clients through the litigation process to obtain justice first and foremost as well as recovering the maximum possible damages for them.
“This will cover all potential outcomes for the case.
“Despite the Harrods scheme seeking to narrow the potential issues, we believe that there are numerous potential defendants in a number of jurisdictions that are liable for what our clients went through, and we are committed to securing justice for our client group.
“KP Law is confident that it will recover more for its clients than what could be achieved through the redress scheme established by Harrods, which in our view is inadequate and does not go far enough to compensate victims of Mr al Fayed.”
The verbal battle between Harrods and KP Law underlines the fact that the battle for compensation and wider justice for survivors of Mr al Fayed remains far from complete.
The billionaire, who died in 2023, is thought to have sexually abused hundreds of women during a 25-year reign of terror at Harrods.
He also owned Fulham Football Club and Paris’s Ritz Hotel.
Harrods is now owned by a Qatari sovereign wealth fund controlled by the Gulf state’s ruling family.
The redress scheme commissioned by the department store is being coordinated by MPL Legal, an Essex-based law firm.
Last October, lawyers acting for victims of Mr al Fayed said they had received more than 420 enquiries about potential claims, although it is unclear how many more have come forward in the six months since.
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