Government borrowing falls…but what’s the cost of COVID?

By Alfie Mullan

Posted 2nd Jul 2021

Reading Time: 3 Minutes

HM revenue and customers sign with money floating by

With the UK economy now firmly in recovery mode, government borrowing is starting to fall.

The latest official figures show lower government borrowing in May compared to the same month last year. Borrowing in May stood at £24.3 billion, down £19.4 billion compared to a year earlier. This borrowing figure is calculated as the difference between government spending and tax revenue.

Despite a falling borrowing figure as the economy starts its post-pandemic recovery, the government still borrowed its second-highest amount in May since records began.

The government is continuing to spend billions of pounds on its package of financial support measures, including the furlough scheme, which runs until the end of September.

As a result of continued significant government borrowing, total debt has reached £2.2 trillion, equivalent to 99.2% of gross domestic product (GDP). It’s the highest amount of public debt, as a proportion of GDP, since the early 1960s.

The latest estimate from the Office for National Statistics (ONS) expects total government borrowing of £299.2 billion in the financial year to March. This total borrowing is £1.1 billion lower than the previous estimate from the ONS, but the highest amount borrowed since the end of World War Two.

Day-to-day government spending increased by £204.2 billion to £942.6 billion last year due to the cost of supporting individuals and businesses throughout the pandemic.

One factor helping to reduce government borrowing in May was higher tax revenue as the economy reopened. Tax revenue for HM Treasury increased by 15% in May, with government spending reducing by 12%.

Responding to the latest borrowing figures, Chancellor Rishi Sunak confirmed his pledge to “get the public finances on a sustainable footing,” saying:

“That’s why at the Budget in March, I set out the difficult but necessary steps we are taking to keep debt under control in the years to come.”

But what does that mean for us?

Well the truth is, we don’t know yet. There’s plenty of speculation that the Treasury is considering a trio of potential pension tax cuts ideas to help balance the books.  

And while we can’t pretend to be any more plugged into the inner thinking of the Treasury than anyone else, there are a few things to take into account when looking at the speculation around the proposals. 

The first rumour is understood to be a cut to lifetime allowance from its current rate of £1,073,100 to £800,000 or £900,000. It’s worth remembering that the Chancellor announced in the Spring Budget the lifetime allowance will not increase with inflation and will be frozen at its current rate until 2025/26.

There is further speculation about a switch to a flat-rate of pension tax relief on contributions. This isn’t the first time this has been speculated about but given its perceived unpopularity, it hasn’t been implemented yet. 

Finally, there’s talk of a new tax on employer pension contributions. Currently employers receive pension tax relief on their employee pension contribution

A further key decision the government could make soon is over the state pension triple lock, which increases by inflation, 2.5% or average earnings, whichever is higher. As average earnings increased by 5.6% for the three months to April 2021, this could see the state pension rise by the same amount or higher unless the government takes action. The Sunday Times reported Treasury officials are now looking at a one-year pause on triple lock increases.

We’re listening in to the speculation as keenly as many of you will be. As soon as there’s anything concrete that affects your position, we’ll be in touch.