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.

Key Takeaways

  • Public sector net borrowing is the term used for the U.K. government fiscal deficit.
  • A government creates a fiscal deficit by spending more money than it takes in from taxes and other revenues excluding debt.
  • The gap between income and spending is closed by government borrowing.

Understanding Public Sector Net Borrowing

Public sector net borrowing is equal to the UK 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. In the campaign for the June 2017 general election, all major parties advocated decreasing public sector net borrowing.

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 is costing the Treasury £440 million a week, far more than the UK 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. 

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, up its spending cuts, or 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 as part of the EU. 

The U.K. runs a current account deficit with Europe. However, the service sector operates as a surplus — meaning the U.K. exports more than it imports. Of its exports, banking and financial services make up 26%. Under a "hard" Brexit, where trade falls back to World Trade Organization (WTO) rules, the inability to operate on a level field will potentially impact most, if not all, of these jobs. The U.K. and the European Union reached an agreement on December 24th, 2020 that avoids this harsh scenario.