Figures for April and May have been revised to the down side and June is below anticipated levels. Nevertheless, the Chancellor remains on track to hit the £175 billion borrowing target for the year. At the end of June net debt was £798.8 billion, equivalent to 56.6% of gross domestic product including exposure to the financial sector measured at some £141 billion around 10% of GDP.
In the US, policy makers are considering the need for a second fiscal stimulus to reinvigorate the economy. In the UK, such an option is not possible. The Chancellor is constrained by the existing debt and borrowing levels with no capacity for additional expenditure plans.
The fiscal stabilisers remain vicious in the cycle. In the first quarter of the financial year VAT receipts were down by £5.5 billion, of which some £ 2.3 billion can be explained by the rate reduction. A further £3 billion is explained by a 10% reduction in taxable sales into the downturn.
Taxes on income, profits NI and capital gains tax were down by £4.5 billion. Social security payments increased by over £3 billion in the first three months of the year.
For the first three months of the year over 75% of the increase in borrowing is explained by the “automatic fiscal stabilisers” and the VAT reduction. A recovery in the economy will produce a swing in revenues and a reduction in borrowing. The debt burden may be mitigated by financial sector disposals but the overhang will remain unless a realistic and aggressive programme of revenue enhancement and cost reduction is in place.
ONS : Public Sector Finances June 2009
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