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Reopening of economy in May causes rush to shops and increases VAT and fuel duty receipts

Jun 22, 2021

Government borrowingReopening of economy in May causes rush to shops and increases VAT and fuel duty receipts
The government borrowed less than expected in May when the reopening of the economy prompted a rush to the shops and pushed VAT and fuel duty receipts higher.
Official figures showed borrowing in May was £24.3bn, undershooting the £28.5bn estimate by the Office for Budget Responsibility (OBR) by £4.2bn.
It was less the second highest borrowing total for the month of May since records began in 1993, but was £19.4bn less than May 2020 when the impact of the first cornonvirus lockdown was reflected in the public finances.
Analysts said the stronger than expected economic rebound this year was on course to hand Rishi Sunak a £30bn windfall compared with the OBRs forecast for the current financial year.
The Office for National Statistics warned that its figures were estimates that were more likely to be revised than in previous periods due to the difficulties of collecting data during the pandemic.
However, the Treasury is likely to be cheered by central government receipts that came in at £56.9bn in May, well above the OBRs £55.2bn forecast.
VAT and PAYE income tax receipts were £1.8bn and £800m higher, respectively, than the OBR anticipated. Fuel duty receipts were 77% higher than May 2020 at £4.2bn.
Central government spending of £81.8bn was also lower than the £84.9bn estimated by the OBR, mainly due to a smaller-than-expected quarterly grant payment to self-employed people.
The deficit in spending by local government and public corporations was higher than the OBR expected, forcing them to increase their borrowing.
Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said the better figures for May were unlikely to dent the OBRs judgment that the UK economy will suffer a 3% long-term hit to GDP growth, forcing the Treasury to press ahead with its planned tax rises.
He cited the unprecedented exodus of foreign workers last year, the impending shakeout in the labour market when the furlough scheme ends, and the huge collapse in capex (capital expenditure).
Tombs added: Accordingly, we still think that the government will have to stick to plans to hike corporation tax in 2023 and to increase the effective income tax rate by freezing existing thresholds, if it wants to ensure that public borrowing declines below 4% of GDP in the mid-2020s.
The ONS said public sector net borrowing, which excludes publicly owned banks from its calculation, for the full year to March was estimated to have been £299.2bn, revised down by £1.1bn from last months provisional estimate. After unprecedented spending by the NHS and other government departments on tackling the pandemic, it remains the highest borrowing since financial year records began in 1946.
Michal Stelmach, a senior economist at KPMG, said the public finances should benefit from the winding down of the furlough scheme over the next few months.
Spending should continue to recover in the coming months as the economy absorbs more furloughed workers during the reopening phase, he said.
The furlough scheme, which the OBR expected to cost nearly £50bn less this financial year, is likely to undershoot that forecast thanks to stronger demand for staff and some companies returning unused cash to the exchequer.
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