January usually sees the government collect more in revenues than it spends. Today’s public finance numbers – the last before the Budget – suggest that in January the Government actually borrowed £8.8 billion. This is the first January deficit in ten years and brings the total amount borrowed so far this financial year up to £271bn.
Compared to January 2020, central government receipts in January 2021 were down by £0.8bn while day-to-day spending by central government was up by £20 billion. This included £5bn spent on the Coronavirus Job Retention Scheme and Self-Employment Support Scheme, and a £6bn increase on last January in the amount transferred to local authorities.
While every month since the first lockdown has seen a record level of government borrowing, the ONS estimates for borrowing over the ten months from April 2020 to January 2021 are actually currently running £69bn below the OBR’s latest forecast, which was for borrowing to total £340bn over the same period.
But the ONS estimates are very likely to be revised up. The OBR forecasts already include an allowance for the part of the loans – in particular Bounce Back Loans – made by the Government but which will never be repaid, and this adds to government borrowing now. In contrast the ONS figures do not include any estimate of this. When this is incorporated the borrowing figures will be pushed up, by an estimated £30bn over the financial year. This will bring them closer to, but likely still running below the OBR’s forecast.
As the Chancellor prepares for the upcoming Budget on March 3rd, he will be in no doubt that this year’s borrowing will be record-breaking. But it would be a mistake to try to consolidate the public finances now. The economic scars left by the crisis will be a crucial determinant of its fiscal legacy, and ensuring the recovery in output – and with it government revenues – is as complete as it can be is should be a key focus of the Budget. Substantial net tax rises are likely to be needed at some point to reduce borrowing and keep inflation low, but for now these should wait.