Public Sector Net Borrowing

What Is Public Sector Net Borrowing?

Public sector net borrowing is a British term referring to the fiscal deficit. A fiscal deficit is a shortfall in a government's income compared with its spending. A government that has a fiscal deficit is spending more than it takes in from taxes or trade.

Understanding Public Sector Net Borrowing

Public sector net borrowing is equal to the U.K. government's expenditures minus its total receipts. If this number is positive, the country is running a fiscal deficit; a negative number represents a fiscal surplus. The figures are not seasonally adjusted or adjusted for inflation.

Britain's Office of National Statistics issues an estimate of the public sector net borrowing each month. This statistic is often used by forex traders to determine the fundamental strength of the British economy and currency.

The British government has run a budget deficit in most months in recent years, though post-crisis austerity policies have caused its net debt to fall from a peak above £2.3 trillion (or 146% of GDP) in 2010 to less than £2.1 trillion (102%) in the third quarter of 2020.

Net Borrowing and Brexit

Brexit is an abbreviation for "British exit," referring to the U.K.'s decision in a June 23, 2016 referendum to leave the European Union (EU). The vote's result defied expectations and roiled global markets, causing the British pound to fall to its lowest level against the dollar in 30 years.

According to some governmental reports, the Brexit vote was costing the Treasury £440 million a week in 2018, far more than the U.K. ever contributed to the EU budget.

"Two years on from the referendum, we now know that the Brexit vote has seriously damaged the economy," wrote the author of the report and the deputy director of the pro-EU CER, John Springford.  As time marches on, these numbers become more pronounced. In October 2021, the ramifications of Brexit showed saw a reduction in traded goods of 15.7%.

Office for Budget Responsibility (OBR), which is an independent statistics watchdog, has echoed the bearish sentiment, forecasting Brexit to lift the U.K.'s deficit and debt, leaving the government pressured to increase taxes and its spending cuts or to impose a mixture of the two. The OBR attributes estimates for declining U.K. revenues to it becoming a more isolated country, less open to trade, investment, and migration than it was part of the EU. 

In 2021, the U.K.'s exports totaled £619 billion and imports totaled £648 billion. Of these exports, the EU accounted for 42%. The U.K. trade deficit widened to £21.2 billion in the three months to January 2022. This is an increase from the £12.7 billion for the three months preceding it.

Net Borrowing and the Pandemic

The COVID-19 pandemic sent shockwaves through the world's financial markets. Inflation hasn't been the only concern, and countries with large import/export markets such as the U.K. have had to pivot rapidly to maintain trade balances.

U.K. reached a peacetime high borrowing rate of 15.2% of GDP in 2021. Most of this was to fund the government's Covid-19 relief package. The OBR has stated that the borrowing position the U.K. is in is "not sustainable" and although the U.K. aims to borrow 3.3% of GDP versus the 15.2% in 2021, this still leaves them in a position where they are developing policies to deliver fiscal tightening by 2026.

The U.K. is watching its financial situation closely as they do not want to enact the same policies it did during the global financial crisis of 2008. During that period the U.K. saw substantial spending cuts and tax increases (mainly by raising the value-added tax, or VAT) that although was delivered close to their fiscal tightening targets by 2015, the deficit in fact remained higher than expected.

The OBR maintains that the pandemic will have a less-pronounced financial effect compared to the crisis 14 years ago. However, it is still rather early to be making long-term predictions on the true effect COVID-19 will have on the U.K., especially considering trade issues will be further compounded because when compared to 2008, the U.K. is a much more isolated trade partner due to Brexit.

U.K. Government Income

New forecasts were published by the OBR on March 23, 2022. They expect borrowing to fall each year from 2021 to 2026, from 54% of GDP in 2021/2022 to 1.1% in 2026/2027. The government aims to use its income to help match these targets in certain ways.

In 2021, the government raised £791 billion from taxes and other sources. This is much lower than the £829 billion taken in 2019/2020. However, the government states that the income is not far off from the size of the economy in 2021.

Some sectors were hit harder than others. Air passenger duty receipts fell 90% in 2021. Business rates receipts fell £10.6 billion versus 2019/2020. VAT receipts were £15 billion lower than the year before.

The U.K.'s two largest income sources are income tax and National Insurance contributions. Both of these sectors benefited from the taxable payments made to furloughed workers during the pandemic.

The Bottom Line

The U.K. is currently running at a trade deficit but still sees significant trade with the EU which they formally left only a few years ago. The country borrowed massive amounts during the worst part of the pandemic but looks to bring its fiscal policy back to normalized levels by 2026.