UK borrowing drops lower than expected in September

Public sector borrowing of £21.8bn last month was £7bn less than a year ago

Office workers and commuters walk through London's Canary Wharf. UK government spending is starting to fall as life slowly returns to normal. PA

UK government borrowing fell slightly more than expected in September, as the economy continued its recovery from Covid-19 lockdowns.

Public sector borrowing, the difference between spending and tax income, stood at £21.8 billion last month, according to the Office for National Statistics.

This was £7bn less than September last year when the country was still grappling with the economic effects of the pandemic.

The September reading was slightly below the £22.6bn expected by economists, but it was still the second-highest for the month since records began in 1993.

Chancellor of the Exchequer Rishi Sunak said the figures show recovery is well under way, with more employees on payrolls than ever before and the fastest forecast growth in the G7 this year.

“But the pandemic has had a huge impact on our economy and caused our debt levels to rise, he said.

“At the Budget and Spending Review next week I will set out how we will continue to support public services, businesses and jobs while keeping our public finances fit for the future.”

Britain’s borrowing hit record levels during the pandemic, hitting £300.3bn in the 2020/21 financial year, or 14.3 per cent of annual economic output, the highest share on this measure since the end of the Second World War.

With low tax receipts and high expenditure continuing as the country eases out of lockdown, the public sector borrowed £319.9 billion between the end of March and September.

As a result, government debt now stands at £2.2 trillion at the end of September - around 95.5 per cent of the country’s gross domestic product and the highest level since 1963.

The latest figures show, however, that government spending is starting to fall - dropping £1.3bn on September 2020 to £84.1bn.

This was higher than the amount it received in taxes, which stood at £62.3bn - £6.2bn more than September last year. Tax revenue alone was up £4.7bn to £45.6bn.

“September’s public finances figures mean that the Chancellor will be able to boast in next Wednesday’s Budget that he has reduced government borrowing much quicker than expected,” said Paul Dales, chief UK economist at Capital Economics.

Mr Dales said the improvement was partly due to a stronger economy generating more tax revenues and spending being lower than expected.

“Admittedly, current expenditure of £74.1bn was a bit higher than the £73.6bn recorded last September," said Mr Dales.

Only a small part of that was due to spending on the furlough and self-employment income schemes as they wound up in September with a spend of £1.3bn that month, with the whole scheme costing the government £96.8bn.

However, high interest payments bill on the debt accumulated during the health crisis hit £4.8bn in September, accounting for more of the September spending total, due to rising inflation.

The is the same amount of interest as September last year, despite borrowing levels in the month falling and tax receipts rising year on year with the ONS attributing that to the Retail Price Index measure of inflation rising - which is linked to government interest payments - as the economy recovers.

“All these numbers are still huge,” said Mr Dales. “Even so, the public finances are improving quicker than most expected. But the Chancellor will probably keep a tight grip on the public finances in next Wednesday’s Budget.”