Borrowing is falling but Sunak faces the most challenging situation for a chancellor in decades

Published

4 years ago

August 20, 2021

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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.

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.

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.

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.

“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.

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.

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.

Business

NSK plans to shut UK factories – placing hundreds of jobs at risk

Published

10 hours ago

November 12, 2025

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NSK plans to shut UK factories - placing hundreds of jobs at risk

A Japanese manufacturing firm is facing a union battle over plans to shut factories in County Durham with the loss of hundreds of jobs.

NSK said it was proposing to close its two sites in Peterlee as part of a strategy to exit unprofitable businesses.

The factories, which produce bearings for the automotive industry, employ up to 400 people.

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NSK said it had begun consultations with union representatives on its plans.

Unite the Union said it would fight the planned closures. It described the announcement as a “betrayal” of the workforce.

The company first began operations at Peterlee in 1976. It has another UK manufacturing facility at Newark in Nottinghamshire and another three in Germany and Poland.

The Peterlee factories produce bearings for steering columns and wheel hubs.

Its customers are understood to include VW, Renault and fellow Japanese firm Nissan, which has sprawling car production facilities just up the coast at nearby Sunderland.

Its statement said NSK Europe had faced “persistent challenges in the profitability of locally manufactured products”.

“NSK will continue discussions with stakeholders and provide support measures for affected staff if the closure proceeds, which is expected to be completed no later than March 2027.

“The company has not yet determined the full impact of this decision on its business performance,” the statement concluded.

Challenges for UK manufacturers in recent times include Brexit red tape and high energy costs, though the Peterlee operation is understood to have been run on power generated purely from wind.

Unite blamed pressures on automotive parts suppliers from weak demand hitting car manufacturers during the transition away from internal combustion engines to electric vehicles.

Its general secretary Sharon Graham said: “This is a complete betrayal by NSK of its County Durham workforce, who have broken their backs hitting performance targets that they were told would keep their factories safe.

“There is a viable business case for keeping these sites open and Unite will fight tooth and nail for that to happen.”

Unite said it was urging the government to intervene with financial support to protect automotive jobs.

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Thousands of NHS staff to be made redundant after funding agreed

Published

10 hours ago

November 12, 2025

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Thousands of job cuts at the NHS will go ahead after the £1bn needed to fund the redundancies was approved by the Treasury.

The government had already announced its intention to slash the headcount across both NHS England and the Department of Health by around 18,000 administrative staff and managers, including on local health boards.

The move is designed to remove “unnecessary bureaucracy” and raise £1bn a year by the end of the parliament to improve services for patients by freeing up more cash for operations.

NHS England, the Department of Health and Social Care, and the Treasury had been in talks over how to pay for the £1bn one-off bill for redundancies.

It is understood the Treasury has not granted additional funding for the departures over and above the NHS’s current cash settlement, but the NHS will be permitted to overspend its budget this year to pay for redundancies, recouping the costs further down the line.

‘Every penny will be spent wisely’

Chancellor Rachel Reeves is set to make further announcements regarding the health service in the budget on 26 November.

And addressing the NHS providers’ annual conference in Manchester today, Mr Streeting is expected to say the government will be “protecting investment in the NHS”.

He will add: “I want to reassure taxpayers that every penny they are being asked to pay will be spent wisely.

“Our investment to offer more services at evenings and weekends, arm staff with modern technology, and improving staff retention is working.

“At the same time, cuts to wasteful spending on things like recruitment agencies saw productivity grow by 2.4% in the most recent figures – we are getting better bang for our buck.”

Mr Streeting’s speech is due to be given just hours after he became entrenched in rumours of a possible coup attempt against Sir Keir Starmer, whose poll ratings have plummeted ahead of what’s set to be a tough budget.

Mr Streeting’s spokesperson was forced to deny he was doing anything other than concentrating on the health service.

He is also expected on Wednesday to give NHS leaders the go-ahead for a 50% cut to headcounts in Integrated Care Boards, which plan health services for specific regions.

They have been tasked with transforming the NHS into a neighbourhood health service – as set down in the government’s long-term plans for the NHS.

Those include abolishing NHS England, which will be brought back into the health department within two years.

Watch Wes Streeting on Mornings With Ridge And Frost from 7am on Sky News.

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Unemployment rate jumps to highest level since late 2020 ahead of budget

Published

1 day ago

November 11, 2025

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Unemployment rate jumps to highest level since late 2020 ahead of budget

The UK’s jobless rate has risen to a level not seen since late 2020, according to official figures released ahead of the budget.

The Office for National Statistics (ONS) reported a figure of 5% covering the three months to September – up from 4.8% reported last month. It was a larger leap than economists had predicted, and the ONS said that men were worst affected by the shift.

It leaves the jobless rate at its highest level since December 2020-February 2021.

It had stood at 4.1% when Labour took office last year.

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There was no better news for Chancellor Rachel Reeves in wider, experimental, HMRC data released by the ONS, which showed a 32,000 decline in payrolled employment during October.

That suggested a pause to a more recent trend of declines slowing since sharp falls first witnessed in the spring of this year.

It was April when measures introduced in Ms Reeves’s first budget came into effect, with hikes in minimum pay and employer national insurance contributions hammering employment and investment sentiment in the private sector.

It also coincided with peak US trade war uncertainty as Donald Trump ramped up his tariffs.

ONS director of economic statistics Liz McKeown said of the data: “Taken together these figures point to a weakening labour market.

“The number of people on payroll is falling, with revised tax data now showing falls in most of the last 12 months.

“Meanwhile the unemployment rate is up in the latest quarter to a post pandemic high. The number of job vacancies, however, remains broadly unchanged.

“Wage growth in the private sector slowed further, but we continue to see stronger public sector pay growth, reflecting some pay rises being awarded earlier than they were last year.”

In good news, the overall slowing in the pace of wage growth and weakening jobs market should help bolster the case for an interest rate cut by the Bank of England next month, assuming inflationary pressures continue to ease after last week’s rate hold.

The ONS figures were released as the clock ticks down to the chancellor’s second budget due on 26 November.

Ms Reeves used an event in Downing Street last week to prepare the ground for a painful series of measures that are expected to be only partly offset by some announcements to keep Labour MPs onside, as she stares down a black hole in the public finances believed to be in the region of £30bn.

She has signalled a break from Labour’s manifesto tax pledge not to raise income tax, national insurance or VAT, on the grounds that the world has changed since that promise was made.

The chancellor’s gripes include Brexit and the effects of the US trade war.

Nevertheless, a spending priority would appear to be the lifting of the two-child benefit cap. That would take an estimated 350,000 children out of poverty, according to the Child Poverty Action Group.

Liberal Democrat Treasury spokesperson, Daisy Cooper, said of the employment data: “Surely the writing is on the wall now for the chancellor’s jobs tax.

“Everyone except Rachel Reeves seems to have woken up to the fact that forcing small businesses to pay more in tax for giving people jobs would damage job opportunities. Now the proof is staring her in the face.

“The government must reverse their damaging national insurance hike at the budget, and commit to saving the small businesses who employ millions in Britain and are at risk of collapse, if they’re to have any hope of reversing today’s concerning trend.”

The Conservatives accused Ms Reeves of presiding over a “high-tax, anti-business” agenda.

Secretary of State for Work and Pensions, Pat McFadden, said: “Over 329,000 more people have moved into work this year already, but today’s figures are exactly why we’re stepping up our plan to Get Britain Working.

“We’ve introduced the most ambitious employment reforms in a generation to modernise jobcentres, expand youth hubs and tackle ill-health through stronger partnerships with employers.

“And this week we’re going further by launching an independent investigation that will bolster our drive to ensure all young people are earning or learning.

“We’re backing businesses to grow and create jobs by cutting red tape, signing trade deals and securing hundreds of billions in investment, which helped make the UK the fastest growing economy in the G7 in the first half of this year.”