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

Chair candidates battle to check in at Premier Inn-owner Whitbread

Published

3 hours ago

April 27, 2025

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Chair candidates battle to check in at Premier Inn-owner Whitbread

Two chairs of FTSE-100 companies are vying to succeed Adam Crozier at the top of Whitbread, the London-listed group behind the Premier Inn hotel chain.

Sky News has learnt that Christine Hodgson, who chairs water company Severn Trent, and Andrew Martin, chair of the testing and inspection group Intertek, are the leading contenders for the Whitbread job.

Mr Crozier, who has chaired the leisure group since 2018, is expected to step down later this year.

The search, which has been taking place for several months, is expected to conclude in the coming weeks, according to one City source.

Ms Hodgson has some experience of the leisure industry, having served on the board of Ladbrokes Coral Group until 2017, while Mr Martin was a senior executive at the contract caterer Compass Group and finance chief at the travel agent First Choice Holidays.

Under Mr Crozier’s stewardship, Whitbread has been radically reshaped, selling its Costa Coffee subsidiary to The Coca-Cola Company in 2019 for nearly £4bn.

The company has also seen off an activist campaign spearheaded by Elliott Advisers, while Mr Crozier orchestrated the appointment of Dominic Paul, its chief executive, following Alison Brittain’s retirement.

It said last year that it sees potential to grow the network from 86,000 UK bedrooms to 125,000 over the next decade or so.

Mr Crozier is one of Britain’s most seasoned boardroom figures, and now chairs BT Group and Kantar, the market research and data business backed by Bain Capital and WPP Group.

He previously ran the Football Association, ITV and – in between – Royal Mail Group.

On Friday, shares in Whitbread closed at £25.41, giving the company a market capitalisation of about £4.5bn.

Whitbread declined to comment this weekend.

Business

Bank chiefs to Reeves: Ditch ring-fencing to boost UK economy

Published

1 day ago

April 26, 2025

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Bank chiefs to Reeves: Ditch ring-fencing to boost UK economy

The bosses of four of Britain’s biggest banks are secretly urging the chancellor to ditch the most significant regulatory change imposed after the 2008 financial crisis, warning her its continued imposition is inhibiting UK economic growth.

Sky News has obtained an explosive letter sent this week by the chief executives of HSBC Holdings, Lloyds Banking Group, NatWest Group and Santander UK in which they argue that bank ring-fencing “is not only a drag on banks’ ability to support business and the economy, but is now redundant”.

The CEOs’ letter represents an unprecedented intervention by most of the UK’s major lenders to abolish a reform which cost them billions of pounds to implement and which was designed to make the banking system safer by separating groups’ high street retail operations from their riskier wholesale and investment banking activities.

Their request to Rachel Reeves, the chancellor, to abandon ring-fencing 15 years after it was conceived will be seen as a direct challenge to the government to take drastic action to support the economy during a period when it is forcing economic regulators to scrap red tape.

It will, however, ignite controversy among those who believe that ditching the UK’s most radical post-crisis reform risks exacerbating the consequences of any future banking industry meltdown.

In their letter to the chancellor, the quartet of bank chiefs told Ms Reeves that: “With global economic headwinds, it is crucial that, in support of its Industrial Strategy, the government’s Financial Services Growth and Competitiveness Strategy removes unnecessary constraints on the ability of UK banks to support businesses across the economy and sends the clearest possible signal to investors in the UK of your commitment to reform.

“While we welcomed the recent technical adjustments to the ring-fencing regime, we believe it is now imperative to go further.

“Removing the ring-fencing regime is, we believe, among the most significant steps the government could take to ensure the prudential framework maximises the banking sector’s ability to support UK businesses and promote economic growth.”

Work on the letter is said to have been led by HSBC, whose new chief executive, Georges Elhedery, is among the signatories.

His counterparts at Lloyds, Charlie Nunn; NatWest’s Paul Thwaite; and Mike Regnier, who runs Santander UK, also signed it.

While Mr Thwaite in particular has been public in questioning the continued need for ring-fencing, the letter – sent on Tuesday – is the first time that such a collective argument has been put so forcefully.

The only notable absentee from the signatories is CS Venkatakrishnan, the Barclays chief executive, although he has publicly said in the past that ring-fencing is not a major financial headache for his bank.

Other industry executives have expressed scepticism about that stance given that ring-fencing’s origination was largely viewed as being an attempt to solve the conundrum posed by Barclays’ vast investment banking operations.

The introduction of ring-fencing forced UK-based lenders with a deposit base of at least £25bn to segregate their retail and investment banking arms, supposedly making them easier to manage in the event that one part of the business faced insolvency.

Banks spent billions of pounds designing and setting up their ring-fenced entities, with separate boards of directors appointed to each division.

More recently, the Treasury has moved to increase the deposit threshold from £25bn to £35bn, amid pressure from a number of faster-growing banks.

Sam Woods, the current chief executive of the main banking regulator, the Prudential Regulation Authority, was involved in formulating proposals published by the Sir John Vickers-led Independent Commission on Banking in 2011.

Legislation to establish ring-fencing was passed in the Financial Services Reform (Banking) Act 2013, and the regime came into effect in 2019.

In addition to ring-fencing, banks were forced to substantially increase the amount and quality of capital they held as a risk buffer, while they were also instructed to create so-called ‘living wills’ in the event that they ran into financial trouble.

The chancellor has repeatedly spoken of the need to regulate for growth rather than risk – a phrase the four banks hope will now persuade her to abandon ring-fencing.

Britain is the only major economy to have adopted such an approach to regulating its banking industry – a fact which the four bank chiefs say is now undermining UK competitiveness.

“Ring-fencing imposes significant and often overlooked costs on businesses, including SMEs, by exposing them to banking constraints not experienced by their international competitors, making it harder for them to scale and compete,” the letter said.

“Lending decisions and pricing are distorted as the considerable liquidity trapped inside the ring-fence can only be used for limited purposes.

“Corporate customers whose financial needs become more complex as they grow larger, more sophisticated, or engage in international trade, are adversely affected given the limits on services ring-fenced banks can provide.

“Removing ring-fencing would eliminate these cliff-edge effects and allow firms to obtain the full suite of products and services from a single bank, reducing administrative costs”.

In recent months, doubts have resurfaced about the commitment of Spanish banking giant Santander to its UK operations amid complaints about the costs of regulation and supervision.

The UK’s fifth-largest high street lender held tentative conversations about a sale to either Barclays or NatWest, although they did not progress to a formal stage.

HSBC, meanwhile, is particularly restless about the impact of ring-fencing on its business, given its sprawling international footprint.

“There has been a material decline in UK wholesale banking since ring-fencing was introduced, to the detriment of British businesses and the perception of the UK as an internationally orientated economy with a global financial centre,” the letter said.

“The regime causes capital inefficiencies and traps liquidity, preventing it from being deployed efficiently across Group entities.”

The four bosses called on Ms Reeves to use this summer’s Mansion House dinner – the City’s annual set-piece event – to deliver “a clear statement of intent…to abolish ring-fencing during this Parliament”.

Doing so, they argued, would “demonstrate the government’s determination to do what it takes to promote growth and send the strongest possible signal to investors of your commitment to the City and to strengthen the UK’s position as a leading international financial centre”.

Business

Post Office to unveil £1.75bn banking deal with big British lenders

Published

2 days ago

April 25, 2025

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Post Office to unveil £1.75bn banking deal with big British lenders

The Post Office will next week unveil a £1.75bn deal with dozens of banks which will allow their customers to continue using Britain’s biggest retail network.

Sky News has learnt the next Post Office banking framework will be launched next Wednesday, with an agreement that will deliver an additional £500m to the government-owned company.

Banking industry sources said on Friday the deal would be worth roughly £350m annually to the Post Office – an uplift from the existing £250m-a-year deal, which expires at the end of the year.

Money latest: ’14 million Britons on course for parking fine this year’

The sources added that in return for the additional payments, the Post Office would make a range of commitments to improving the service it provides to banks’ customers who use its branches.

Banks which participate in the arrangements include Barclays, HSBC, Lloyds Banking Group, NatWest Group and Santander UK.

Under the Banking Framework Agreement, the 30 banks and mutuals’ customers can access the Post Office’s 11,500 branches for a range of services, including depositing and withdrawing cash.

The service is particularly valuable to those who still rely on physical cash after a decade in which well over 6,000 bank branches have been closed across Britain.

In 2023, more than £10bn worth of cash was withdrawn over the counter and £29bn in cash was deposited over the counter, the Post Office said last year.

A new, longer-term deal with the banks comes at a critical time for the Post Office, which is trying to secure government funding to bolster the pay of thousands of sub-postmasters.

Reliant on an annual government subsidy, the reputation of the network’s previous management team was left in tatters by the Horizon IT scandal and the wrongful conviction of hundreds of sub-postmasters.

A Post Office spokesperson declined to comment ahead of next week’s announcement.