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ICAEW analysis: £10.4bn public sector deficit in July

Author: ICAEW Insights

Published: 20 Aug 2021

The figures suggest the Chancellor has some tough decisions to make the public finances more sustainable, says Alison Ring, ICAEW Public Sector Director.

The latest public sector finances released on Friday 20 August reported a deficit of £10.3bn for July 2021, as COVID-related spending continued to weigh on the public finances. This was an improvement from the £20.5bn reported for the same month last year but compares with a surplus of £1.1bn in July 2019 and is the second-highest monthly deficit for July since 1997.

Public sector net debt reduced from £2,218.4bn at the end of June to £2,216.0bn or 98.8% of GDP at the end of July as VAT and self-assessment tax receipts contributed to a positive net cash flow in the month. Despite that small dip, public sector net debt is £78.6bn higher than March 2021 and £418.3bn higher than March 2020 just sixteen months ago.

Alison Ring, ICAEW Public Sector Director, said: “Last month registered the second-highest July deficit on record, which further emphasises the weak fiscal foundations underpinning the upcoming three-year Spending Review in October.”

Ring continued: “There is a difficult choice to be made on the state pension, which at over £105bn a year is the second largest individual item in the public sector budget after the NHS. Sticking with the triple lock formula could make a significant contribution to increasing pensioner incomes but would reduce the amount available for public services by tens of billions of pounds over the coming decade.

“While there is borrowing capacity to fund temporary spending needs such as tackling the NHS waiting list backlog, the Chancellor has some very tough decisions to make the public finances more sustainable. It remains to be seen if he can restrain growth in overall public spending and maintain manifesto commitments to not raise the main rates of tax, while delivering on social care reform and other long-term pledges.”

As in previous months this financial year, the deficit came in below the official forecast for 2021-22 prepared by the Office for Budget Responsibility, which is likely to reduce its projected deficit of £234bn for the full year when it updates its forecasts at the fiscal event now set for 27 October.

Cumulative receipts in the first four months of the financial year of £277.2bn were £40.0bn or 17% higher than a year previously, but this was only £7.7bn or 3% above the level seen a year before in 2019-20. At the same time cumulative expenditure of £321.3bn was £28.6bn or 8% lower than the first four months of 2020-21, but £63.7bn or 25% higher than the same period two years ago.

Interest amounted to £21.6bn in the four months to July 2021. This was £7.0bn or 48% higher than the same period in 2020-21 as a consequence of the effect of higher inflation on index linked gilts, albeit £1.8bn or 8% lower than the equivalent four months ended 31 July 2019 despite much higher levels of debt.

Cumulative net public sector investment in the four months to July 2021 was flat from last year with £12.3bn invested. This was £1.9bn or 18% more than two years ago.

Overall, the cumulative deficit for the first four months of the 2021-22 financial year was £78.0bn, £61.7bn or 44% below that of the same period a year previously, but £56.1bn or 256% higher than the first four months of the 2019-20 financial year.

Debt movements reflected £0.6bn of additional borrowing over and above the deficit for the four months, with funding for coronavirus loans to businesses offset by cash inflows from tax receipts in July, in particular from VAT and self-assessment.

The Office for National Statistics revised the reported deficit for the year ended 31 March 2021 up by £0.3bn from £297.7bn to £298.0bn. The final total is expected to exceed £300bn as the ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number. Estimates will be refined further over the next few months. 

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for April 2021 from £26.1bn to £26.0bn, for May 2021 from £20.6bn to £20.2bn and for June 2021 from £22.7bn to £21.5bn. The deficit for the twelve months ended 31 March 2021 was revised up from £297.7bn to £298.0bn.

For further information, read the public sector finances release for July 2021.

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