UK governments have long been short of budget; to some extent, they have been able to make up for this deficit with loans. With the UK having left the EU, it will have to act independently in many cases after long years and consider more funding. Also, with the spread of the coronavirus, income levels have dropped in general; in addition, large amounts of money have been spent on care, medicine, prevention and general vaccination. Although the Johnson government has devised plans to get past Covid-19, it is facing a serious budget deficit it wants to compensate for by raising taxes.
Britain’s Negative Budget Balance
In 2020/21, government revenue – from taxes and other revenues – was £793 billion, while government spending was £1,093 billion (£1.1 trillion). The deficit was therefore £303 billion, equivalent to 14.3% of GDP, which is a peacetime record. As will be discussed below, the budget deficit ballooned because of the coronavirus pandemic. Borrowing financed around 27%, or £1 in every £3.60, of public spending in 2020/21. The borrowing of £303 billion is equivalent to around £4,500 per head of the UK’s population. The deficit reached a peacetime record in 2020/21 for two reasons: the government spent hundreds of billions of pounds supporting public services, households and businesses during the pandemic.
The Covid-19 lockdowns, aimed at slowing its spread, took the economy into a severe recession. Less economic activity has meant less tax revenues and more government spending on areas such as unemployment benefits. Government spending increased from 39.8% of GDP in 2019/20 to 52.2% in 2020/21. While government revenues fell in cash terms, they became larger relative to the size of the economy. This was because the economy shrank more than revenues did. The UK’s general government gross debt was £2,224.5 billion at the end of the financial year ending March 2021, equivalent to 106.0% of the gross domestic product (GDP).
The UK’s general government gross debt was 13.1 percentage points above the average of the 27 European Union (EU) member states at the same point in time. The UK’s general government deficit (or net borrowing) was £304.0 billion in the financial year ending March 2021, equivalent to 14.5% of GDP. The UK’s general government deficit was 0.6 percentage points above the average of the 27 EU member states in the same period. The current-account gap, which also includes flows of investment income, may almost double to 6.4% of economic output this year, according to the UK’s fiscal watchdog. The forecast reflects an export performance hobbled by Brexit and strong demand for foreign-made goods as the economy rebounds at pace from the pandemic.
Financing the Budget Deficit
The budget deficit is financed with the sale of government bonds. These are essentially interest paying “IOUs” which the government sells to investors. Purchasers of government bonds include pension funds, insurance companies, households and overseas investors. The bonds make up most government debt. Once the bonds have been bought, they can be traded by investors on secondary markets. Further information is available in the Library Insight Coronavirus: Government debt, an explainer. The Government has sold record amounts of bonds during the coronavirus pandemic, which is unsurprising given the size of its deficit. Investors were lending to the government at relatively low rates of interest prior to the pandemic and have continued to do so. The Bank of England has been buying large quantities of government bonds from investors on the secondary market. The Bank has been doing this to support the economy during the coronavirus pandemic, through its quantitative easing programme.
The purchases have also made it easier and cheaper for the government to sell new bonds. Further information is available in the Library briefing paper Coronavirus: Economic impact. Fresh figures from the Office for Budget Responsibility, the independent body responsible for forecasting the public finances, showed that measures such as the Treasury’s furlough scheme will total £123bn, up from £103bn in late April. The figures come days after the chancellor, Rishi Sunak, said the government would continue with its wage subsidy scheme until the end of October, with employers expected to bear some of the cost from August.
Johnson’s Budget Deficit Programme
Boris Johnson will challenge rebel Tory MPs to vote down his manifesto-breaking £12bn tax-raising plan to fund health and social care, as he pushed Britain’s tax burden to the highest level since 1950. Johnson will ask MPs to endorse a strategy that moves the Conservatives firmly on to Labour territory and shreds traditional Tory claims to be a low-tax party. “We are the party of the NHS,” Johnson declared.
The prime minister is confident of victory in the Commons vote, as a threatened Tory rebellion over the tax increase melted away. One Tory rebel said he expected only “a handful” of MPs to defy Johnson. After the income tax and corporation tax increases in the March Budget, Johnson’s government was already intending to raise the burden of taxation to 35% of national income by 2025-26, the highest since 1969. Also Rishi Sunak, chancellor, insisted that additional spending on social care would have to be funded by higher taxes rather than more borrowing; national debt currently stands at about 100% of gross domestic product. But Officials in Downing Street are said to be fretting that while the political costs of a tax increase will be high, even a 1.25-percentage-point rise will fail to fix the crisis in social care, or tackle the Covid backlog in the health service.
From April 2022, national insurance contributions for employees, employers and the self-employed will rise by 1.25 percentage points, and there will be the same rise in dividends tax. From April 2023, while the rises will stay the same, the tax rise will be rebranded as a health and social care levy, which will appear separately on people’s tax records. How much is raised depends, obviously, on revenues, but Downing Street says that for the next three years the tax rise will give an additional £12bn a year for health and social care. Of this combined £36bn, £5.4bn over the three years is earmarked for social care in England, with about £500m of this earmarked for training; £16bn will be used for direct NHS England funding; £8.9bn will go on what is termed a “health-based Covid response”, seemingly the NHS England catchup; and £5.7bn will go to devolved nations, to cover both health and social care. It is not clear what proportion will be allocated to social care once the first three years are up.
The focus is gradually shifting to the current-account shortfall, the difference between money coming into the UK and money going out. The gap is forecast to reach its widest since World War II this year as Britain grapples with post-Brexit ties with the European Union and an imports-fuelled rebound from the pandemic. This will test the willingness of foreign investors to keep on funding the spending habits of the nation by buying British assets.Critics have said his plan does not go far enough. They say it will also unfairly increase the tax burden on working-age people.
Boris Johnson also insists on social care, especially for old people. This is a very important issue for the British, and they have been waiting for it for a long time; it became possible under the Johnson government. This issue coincides with tax increases and it has put the people of England in a tight spot; so their protests, especially by the youth and the labour force against tax increases, are not welcome. But Johnson’s claims are not very credible, including the construction of 40 new hospitals, which quickly collapsed.