The UK posted a 31.7 billion-pound budget deficit ($45 billion) in April as the new fiscal year got under way.
The shortfall reported by the Office for National Statistics on Tuesday was in line with the median forecast of economists but well below the 47.3 billion pounds registered in April last year, when the first coronavirus lockdown pummeled the public finances. Chancellor Rishi Sunak nonetheless faces a formidable task to rein in the deficit, which hit a peacetime high of 14.3% of GDP in the last fiscal year. Borrowing in 2021-22 is still expected to total more than 200 billion pounds, or 10% of GDP, and there are doubts that Sunak can deliver on his pledge to balance day-to-day spending and revenue by the middle of the decade without further tax increases.
That will depend on the cost of future spending related to the virus. It will also hinge on how permanent the damage inflicted by the deepest slump in three centuries proves to be. While a strong rebound is under way as the economy reopens, scars are expect to remain.
Tax receipts rise 7% in April from a year earlier, while government spending including capital investment was down almost 12%. Debt climbed to 2.17 trillion pounds, or 98.5% of economic output. While that’s affordable for now, the huge holdings of government bonds now held by the Bank of England means that debt costs would rise significantly were the central bank to raise interests rates, as economists expect.
“We are taking to keep the public finances on a sustainable footing by bringing debt under control over the medium term,” Sunak said in a statement. “But we also need to focus on driving a strong economy recovery from the pandemic.”
The deficit in 2020-21 was 300.3 billion pounds, slightly lower than previously estimated. That figure is almost certain to be revised higher when the ONS incorporates the cost of writing off loans made to companies hit by the pandemic The UK fiscal watchdog estimates the cost of doing so at about 27 billion pounds.