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Government borrowing decreased in April as the UK economy sees bounceback


The UK government has seen its budget deficit reduced in April, as the economy saw a rebound in growth.


The UK government borrowed £31.7bn last month which is £15.6bn lower than April’s figure last year. This reduction comes as the UK phases out of lockdown and infection rates are steadily decreasing. This has allowed more people to return to work and become less dependent on the furlough scheme which accounted for 80% of workers wages. Because of this, the ONS estimates that the total government borrowing for the financial year to March is £300.3 billion. This monumental amount is a result of the COVID-19 pandemic, as well as Brexit too. This has been apparent with various relief packages such as universal credit for the self-employed, which has ramped government debt significantly.


However, this annual borrowing is down slightly from £303.3bn which was the largest record borrowing since WW2 (largest peacetime borrowing). This has been done by the government to ensure its macro-economic objectives are met. This particularly applies to unemployment which currently stands at 4.8%, which would be much higher if furlough was not extended several times from its original longevity. This has allowed the UK to achieve its target to be in the naturally occurring rate of 3-5% for unemployment and maintain the productive capacity of the economy as demand for all goods/services in the economy rises too. Furthermore, to meet further plans such as carbon neutrality in 2050, the UK has also set out plans to plant many more trees to contribute to UK efforts, which is an article that BSE has already covered, available at: https://www.thebackseateconomist.com/post/the-uk-is-taking-bold-steps-to-tackle-climate-change-what-are-the-implications-of-this-strategy


Due to supporting individuals and businesses during the pandemic, the government’s borrowing has increased from £204.1bn to £942.7bn last year, according to the ONS.

This has resultantly pushed government debt to £2.17tn, the BBC reports, which accounts for 98.5% of GDP - this is a rate not seen since the early 1960s. This, therefore, shows how the coronavirus has caused a huge opportunity cost for projects that were set to be established in the pre-lockdown days, however now cannot be ensued further because of the monumental government debt, which is leading to austerity as taxation is still in short supply with many still on furlough and reluctant to spend and so the government receive less ad valorem tax in the form of VAT.


April's borrowing figures were lower than the forecasts which were predicted to hit £39bn, £7.3bn above the actual figure.


The decrease in government borrowing was due to the UK economy gaining more steam again as businesses got busier with tourism spending reaching half of its pre-pandemic levels. This is a very promising figure as, even with apparent restrictions and advisories against travel outside of the local area, tourism has been boosted and therefore spending has too. This has also come with a low interest rate of 0.1%, which has allowed businesses to service debt and take out loans for investment, as well as consumers to take loans and spend lockdown savings, therefore increasing the marginal propensity to the consumer also.


Forecasts by the VisitBritain agency, indicate that domestic tourism will be worth £51.4bn in 2021, down from £91.6bn two years ago. This comes with once again a lack of confidence in the market as new variants of the virus are becoming more widespread globally.


Its forecast for spending by foreign tourists in the UK is £6.2bn, less than a quarter of £28.4bn in 2019. This also comes as a result of the new traffic light system introduced into the UK, which makes travelling abroad difficult, leading to necessary isolation phases and self-testing kits made readily available. For more info on this story, visit: https://www.thebackseateconomist.com/post/uk-announces-easing-of-travel-restrictions-what-does-this-mean-for-the-uk-and-eurozone-s-economy


The BBC states that an increase in tourism generates demand for hospitality industries which were hit hard by the pandemic. This demand is much needed for firms that have seen a huge loss of revenue as closures were made legal nationwide. However, an increase in tourism means there is money entering the UK economy from abroad.


Because of this new wave of demand due to foreign tourists and domestic demand, economic activity increased in the months following from March and April, therefore creating a flurry of rehabilitation to the market. This has also benefited the government and local councils, who have seen an increase in tax revenue which will help mitigate the UK’s budget account deficit. This is through VAT of 20% goods/services in the economy which is passed onto the consumer, and also the increase in activity also boosts job creation as more people are needed to increase production as demand rises and therefore creates more revenue through income tax.


Tax receipts in April were £58bn, which was up slightly from the same month last year when receipts were £54.2bn. This means that the government are able to reduce the deficit that is apparent under current circumstances, and resultantly look forward to spending more on boosting the economy and building large infrastructure projects such as the proposed third runway Heathrow expansion, accounting for ¼ of all UK exports.


Overall, the reduction of the UK’s deficit to the budget is very promising, not only for economic perspectives, but also social ones too, with more investment being made and also the government being able to fund large scale projects that will inevitably change the way we live our lives, such as the HS2 project which will be monumental. This, therefore, shows the UK are on the right path to recovery and this story is very exuberant news that this will be made truthful.

 

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Written by Euan Taylor

Research by Hubert Kucharski.

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