Borrowing Falls ...
Latest figures confirm borrowing will be much lower than expected at the start of the year. In March, the OBR were forecasting borrowing of £234 billion in the current financial year. The strong bounce back in the economy suggests public finances are in much better state than expected.
Revenues have been boosted by the growth in tax receipts. Expenditure has fallen as the return to work continues. Borrowing in May was estimated to be £24.3 billion, that's down by almost £20 billion compared to May last year. Revenues improved for most categories including fuel duties and VAT receipts.
Spending was down compared to prior year. No surprise really, almost 9 million were furloughed at the start of the financial year. We expect this to have fallen to 2.5 million in the second quarter this year.
Total borrowing could fall below £200 billion in the current financial year and below £100 billion next. The level of debt will rise to average £2.4 trillion over the next two years falling to 90% of GDP by the end of 2024.
The UK will experience strong growth as the economy returns to trend rate. We expect growth of over 7% this year and over 5% next. Over the three year period, nominal growth will be over 25%. The economy is set to expand by over £500 billion within the three year period providing a big stimulus to revenues, shrinking the debt to GDP ratio.
Our June Forecast Update is available to view on line and download. This is not a forecast of a boom. Just a return to trend rate of growth following the shock to output last year. We even include a chart on productivity!
Bank Holds Rates ...
The Bank of England Monetary Policy Committee voted this week to keep rates on hold and to maintain the existing target of UK government bond purchases at £875 billion. The bank continues to hang on to the £20 billion of corporate bonds picked up in the Brexit drama five years ago. The logic of the bond acquisition elusive, the language of the government bond purchases now excludes "QE".
Monetary financing of the fiscal deficit is in play. 70% of the debt issued by the DMO last year was picked up by the Central Bank, as the buyer of last resort. It is not until the end of next year, the volume of new debt will fall within the capacity of the private sector. The Bank may have to extend the level of spend to fill the one trillion pound bank note for the Chancellor.
The Bank may suggest the asset purchase programme will be concluded this year but the Old Lady stands ready to "increase the pace of purchases to ensure the effective transmission of monetary policy". Don't expect a rise in interest rates or gilt rates anytime soon.
The MPC expects inflation CPI basis to rise to over 3% in the near term, before returning towards the 2% target by the end of the year. Andy Haldane, the departing Chief Economist, (he's off to the RSA) warned this week, “There’s a rising risk that 3% won’t be the peak and we could see greater persistence and a higher level,” he told Money Week magazine. “Next year could see price pressures building, not abating.”
Now that would be a problem. The real fear is a lock in of wage inflation as prices rise. Coaching staff to return to work is proving to be more of a challenge than expected. Earnings increased by over 5.5% in the three months to April. In the service sector the increase was over 8% in May alone. Recruitment difficulties are increasing, Vacancies are rising to pre lock down levels. EU nationals are reluctant to return. In the UK some 3 million, including over 900,000 in the accommodation and food sector, were on furlough at the end of April. Time to get back to work says the Chancellor.
Worrying also, oil prices continue to rise. We expected oil price to trade within a $65 to $70 dollar band over the summer months. Commodity prices including copper are topping out. Brent crude closed at $76 dollars this week. The calls for $100 dollar barrels improbable but alarming ... Oil is key chart in our "Inflation Chart Book" ... watch this space ...
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