In 2013, the UK first hit the UN target of spending 0.7% of GNI on aid. This briefing looks at the target’s history in the UK and the current reduction to 0.5%.
It’s long been expected that the coronavirus pandemic would push UK government borrowing to a peacetime record in 2020/21. Today we got confirmation of that as the Office for National Statistics has published its first provisional estimate.
The Government borrowed £303 billion in 2020/21, which is equivalent to 14.5% of GDP. Here we look at some of the figures involved.
What’s the broad picture?
The Government borrows to make up the difference between its spending and the income it raises from taxes and other sources. In 2020/21, government raised £791 billion in income and spent £1,094 billion (£1.1 trillion). Borrowing was, therefore, £303 billion, or 14.5% of GDP – a peacetime record.
Government borrowing last exceeded 10% of GDP following the 2007-2009 financial crisis. We need to look back to World War II for the previous time it happened.
Why is borrowing so high?
Broadly speaking, two elements have led to government borrowing ballooning in 2020/21. First, the Government has provided huge sums to support households, businesses, and public services during the pandemic.
Second, the pandemic and related public health restrictions hit the economy hard. This resulted in lower income from taxes and (to a lesser extent) more government spending on areas such as unemployment benefits.
2020/21: Higher spending and lower receipts
Government borrowing was £246 billion higher in 2020/21, compared with 2019/20. Public spending was £208 billion higher, while income was £38 billion lower. Government’s day-to-day spending (known as current spending) increased substantially in 2020/21, particularly on subsidies and goods and services.
In 2020/21, government provided over £140 billion of subsidies, dwarfing the £26 billion paid out in 2019/20. £59 billion was provided through the Coronavirus Job Retention Scheme (the furlough scheme) and £20 billion though it’s sister programme for the self-employed (the SEISS). A further £62 billion went on other subsidies (including business grants and more traditional subsidies).
Goods and services
Day-to-day spending on goods and services increased by £75 billion in 2020/21 to a total of £506 billion. This was partially because of spending by government departments and devolved administrations responding to the coronavirus, including Test and Trace and the cost of vaccines. The total includes central government’s procurement costs, which were £49 billion larger than in 2019/20.
Government spending on debt interest was lower in 2020/21 than in 2019/20. This can be attributed to two factors: lower inflation (the interest paid on around 20% of government debt is linked to inflation) and the Bank of England holding around 30% of government debt.
The effective interest rate paid by government on the debt held by the Bank of England is the UK’s official interest rate (known as the bank rate), which has been at a record low during the pandemic.
Government raised £791 billion in 2020/21 from taxes and other sources, compared with £829 billion in 2019/20. Broadly speaking, its income has fallen in line with the size of the economy during 2020/21.
Individual taxes each have their own 2020/21 tale to tell. Largely due to public health restrictions, air passenger duty receipts fell by 90% in 2020/21. Business rates receipts fell by £10.6 billion compared with 2019/20, as the Government gave a business rates holiday to sectors affected by restrictions. Alcohol duties held up as higher sales in shops made up for the loss in receipts from the closure of pubs and restaurants.
In cash terms, the hardest hit tax was VAT, where receipts were nearly £15 billion lower in 2020/21, compared with 2019/20. Consumers have been less able to go out and spend, and Government policies, such as cutting VAT from 20% to 5% for the ‘hospitality, accommodation and attractions’ sector, have also effected VAT receipts.
The UK’s two largest income sources are income tax and National Insurance contributions. Both have benefited from the taxable payments made to furloughed workers and the self-employed, through the CJRS and SEISS.
More may be added to today’s first estimate
The 2020/21 data are provisional and will be revised over time.
Mostly we can’t predict the size of these revisions. However, we do know that the £303 billion of borrowing doesn’t yet include the cost to the Government of businesses defaulting on virus-related loans.
These loans are guaranteed by the Government and the Office for Budget Responsibility forecasts that write-offs on the loans may cost the Government around £27 billion in 2020/21 (around 1% of GDP). At this stage, no one knows what the true cost will be.
More borrowing means more government debt
As discussed in a previous Insight, government largely borrows by issuing bonds, which add to its stock of debt. Between March 2020 and March 2021, government debt increased from 84% of GDP to 98% of GDP.
The UK has had higher levels of debt, but not since the 1960s when the debt-to-GDP ratio was falling after reaching over 250% of GDP during World War II.
The budget deficit: a short guide, House of Commons Library
Coronavirus: Economic impact, House of Commons Library
The public finances: a historical overview, House of Commons Library
About the author: Matthew Keep is a researcher specialising in the public finances at the House of Commons Library.
Image: ©UK Parliament_Jessica Taylor Attribution 3.0 Unported (CC BY 3.0) (Cropped)