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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Tax burden to reach highest level since 1960s
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.
Food inflation has hit its highest level in almost a year and could continue to go up, according to an industry body.
The British Retail Consortium (BRC) reported a 2.6% annual lift in food costs during April – the highest level since May last year and up from a 2.4% rate the previous month.
The body said there was a clear risk of further increases ahead due to rising costs, with the sector facing £7bn of tax increases this year due to the budget last October.
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It warned that shoppers risked paying a higher price – but separate industry figures suggested any immediate blows were being cushioned by the effects of a continuing supermarket price war.
Kantar Worldpanel, which tracks trends and prices, said spending on promotions reached its highest level this year at almost 30% of total sales over the four weeks to 20 April.
It said that price cuts, mainly through loyalty cards, helped people to make the most of the Easter holiday with almost 20% of items sold at respective market leaders Tesco and Sainsbury’s on a price match.
Its measure of wider grocery inflation rose to 3.8%, however.
Wider BRC data showed overall shop price inflation at -0.1% over the 12 months to April, with discounting largely responsible for weaker non-food goods.
But its chief executive, Helen Dickinson, said retailers were “unable to absorb” the surge in costs they were facing.
“The days of shop price deflation look numbered,” she said, as food inflation rose to its highest in 11 months, and non-food deflation eased significantly.
“Everyday essentials including bread, meat, and fish, all increased prices on the month. This comes in the same month retailers face a mountain of new employment costs in the form of higher employer National Insurance Contributions and increased NLW [national living wage],” she added.
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Five hacks to beat rising bills
While retail sales growth has proved somewhat resilient this year, it is believed big rises to household bills in April – from things like inflation-busting water, energy and council tax bills – will bite and continue to keep a lid on major purchases.
Also pressing on both consumer and business sentiment is Donald Trump’s trade war – threatening further costs and hits to economic growth ahead.
Read more from Sky News:
UK-US trade talks ‘moving in positive way’, says White House
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A further BRC survey, also published on Tuesday, showed more than half of human resources directors expect to reduce hiring due to the government’s planned Employment Rights Bill.
The bill, which proposes protections for millions of workers including guaranteed minimum hours, greater hurdles for sacking new staff and increased sick pay, is currently being debated in parliament.
The BRC said one of the biggest concerns was that guaranteed minimum hours rules would hit part-time roles.
On the outskirts of Ho Chi Minh City, factory workers at Dony Garment have been working overtime for weeks.
Ever since Donald Trump announced a whopping 46% trade tariff on Vietnam, they’ve been preparing for the worst.
They’re rushing through orders to clients in three separate states in America.
Sewing machines buzz with the sound of frantic efforts to do whatever they can before Mr Trump’s big decision day. He may have put his “Liberation Day” tariffs on pause for 90 days, but no one in this factory is taking anything for granted.
Staff have been working overtime
Workers like Do Thi Anh are feeling the pressure.
“I have two children to raise. If the tariffs are too high, the US will buy fewer things. I’ll earn less money and I won’t be able to support my children either. Luckily here our boss has a good vision,” she tells me.
Do Thi Anh
That vision was crafted back in 2021. When COVID struck, they started to look at diversifying their market.
Previously they used to export 40% of their garments to America. Now it’s closer to 20%.
The cheery-looking owner of the firm, Pham Quang Anh, tells me with a resilient smile: “We see it as dangerous to depend on one or two markets. So, we had to lose profit and spend on marketing for other markets.”
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That foresight could pay off in the months to come. But others are in a far more vulnerable state.
Some of Mr Pham’s colleagues in the industry export all their garments to America. If the 46% tariff is enforced, it could destroy their businesses.
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Doubts US will start making what Vietnam delivers
Down by the Saigon River, young couples watch on as sunset falls between the glimmering skyscrapers that stand as a testament to Vietnam’s miracle growth.
Cuong works in finance
Cuong, an affluent-looking man who works in finance, questions the logic and likelihood that America will start making what Vietnam has spent years developing the labour, skills and supply chains to reliably deliver.
“The United States’ GDP is so high. It’s the largest in the world right now. What’s the point in trying to get jobs from developing countries like Vietnam and other Asian nations? It’s unnecessary,” he tells me.
But the Trump administration claims China is using Vietnam to illegally circumvent tariffs, putting “Made in Vietnam” labels on Chinese products.
There’s no easy way to assess that claim. But market watchers believe Vietnam does need to signal its willingness to crack down on so-called “trans-shipments” if it wants to cut a deal with Washington.
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Vietnam can’t afford to alienate China
The US may also demand a major cutback in Chinese manufacturing in Vietnam.
That will be a much harder deal to strike. Vietnam can’t afford to alienate its big brother.
Luke Treloar, head of strategy at KPMG in Vietnam
Luke Treloar, head of strategy at KPMG in Vietnam, is however cautiously optimistic.
“If Vietnam goes into these trade talks saying we will be a reliable manufacturer of the core products you need and the core products America wants to sell, the outcome could be good,” he says.
But the key question is just how much influence China will have on Vietnamese negotiators.
Anything above 10-20% tariffs would be intensively challenging
This moment is a huge test of Vietnam’s resilience.
Anything like 46% tariffs would be ruinous. Analysts say 10-20% would be survivable. Anything above, intensely challenging.
But this looming threat is also an opportunity for Vietnam to negotiate and grow. Not, though, without some very testing concessions.
Business
UK-US trade talks ‘moving in a very positive way’, says White House spokesperson Karoline Leavitt
Trade talks between the UK and the United States are “moving in a very positive way”, according to the White House.
President Donald Trump’s press secretary Karoline Leavitt spoke about the likelihood of the long-discussed agreement during a press briefing.
In Westminster, there are hopes such a deal could soften the impact of the Trump tariffs announced last month.
Leavitt told reporters: “As for the trade talks, I understand they are moving in a very positive way with the UK.
“I don’t want to get ahead of the president or our trade team in how those negotiations are going, but I have heard they have been very positive and productive with the UK.”
She said Mr Trump always “speaks incredibly highly” of the UK.
“He has a good relationship with your prime minister, though they disagree on domestic policy issues,” she added.
“I have witnessed the camaraderie between them first hand in the Oval Office, and there is a deep mutual respect between our two countries that certainly the president upholds.”
White House Press Secretary Karoline Leavitt said she was positive about a deal. Pic: AP
Chancellor of the Duchy of Lancaster Pat McFadden gave the UK’s position on the talks when speaking to Sunday Morning With Trevor Phillips.
He said there was “a serious level of engagement going on at high levels” to secure a UK-US trade deal.
Mr McFadden is one of the most powerful members of Sir Keir Starmer’s government and a key ally of the prime minister.
Read more:
Deal ‘possible’ but not certain
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He was careful to not get ahead of developments, however, saying: “I think an agreement is possible – I don’t think it’s certain, and I don’t want to say it’s certain, but I think it’s possible.”
He went on to say the government wanted an “agreement in the UK’s interests” and not a “hasty deal”, amid fears from critics that Number 10 could acquiesce a deal that lowers food standards, for example, or changes certain taxes in a bid to persuade Donald Trump to lower some of the tariffs that have been placed on British goods.
Mr McFadden’s tone was more cautious than Chancellor Rachel Reeves’ last week.
She had been in the US and, speaking to Sky News business and economics correspondent Gurpreet Narwan, the chancellor said she was “confident” a deal could be done.
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‘We’re confident’, says Reeves
But she sought to play down fears that UK standards could be watered down, both on food and online safety.
“On food standards, we’ve always been really clear that we’re not going to be watering down standards in the UK and similarly, we’ve just passed the Online Safety Act and the safety, particularly of our children, is non-negotiable for the British government,” Ms Reeves said.
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