Government borrowing rose to £36.1bn in September as the country spent heavily to support jobs and the economy through the coronavirus pandemic.
The figure was £28.4bn more than in the same month last year, and the third-highest borrowing in any month since records began in 1993.
Central government spent £77.8bn on day-to-day activities, £18.1bn more than in September 2019. This includes £4.9bn on the furlough scheme and £1.0bn in payments to support self-employed workers, the Office for National Statistics said.
Borrowing in the first six months of this financial year (April to September 2020) was £208.5bn, £174.5bn more than in the same period last year and the highest borrowing in any April to September period since records began. Each of the six months from April to September 2020 were also records.
However, borrowing was 20 per cent lower than the Office for Budget responsibility forecast in July.
While the cost of supporting the economy is mounting, experts have warned that the cost of withdrawing support could be substantially higher as people are pushed out of work and onto benefits, sucking demand out of the economy, heaping further pain on already struggling businesses.
Much of the increased borrowing was due to lower tax receipts, partly because of tax cuts brought in to help businesses, and partly due to lower spending as the virus caused people to cut back on spending.
VAT receipts dropped 30 per cent while corporation tax receipts were down 13 per cent.
By international standards, the UK government’s stimulus measures have been relatively modest at around half of the level deployed in the US or Japan and two-thirds that of Germany, when compared to the size of each nation’s respective economy.
The interest rate on government borrowing remains at historic lows. Over 25 years, Rishi Sunak can borrow at 1.5 per cent meaning that if the economy returns to pre-pandemic levels of growth the interest on the debt could be paid without increasing taxes. Over 10 years, the rate on government gilts is just 0.19 per cent.
“Overall, low inflation and low gilt yields give the Bank of England and the Chancellor the green light to do more to support the economy,” said Paul Dales, chief UK economist at Capital Economics.
The Treasury announced on Wednesday it had scrapped a planned multi-year spending review due later this year and replaced it with a one-year review to focus on the impact on the public accounts from the coronavirus crisis.
The review will take place by the end of November and focus on supporting jobs, setting department resources and capital budgets and block grants for devolved administrations.
Mr Sunak said: “In the current environment it’s essential that we provide certainty. So we’ll be doing that for departments and all of the nations of the United Kingdom by setting budgets for next year, with a total focus on tackling Covid and delivering our Plan for Jobs.”
A crucial deadline is looming next week as the furlough scheme comes to an end while much of the country remains under stricter lockdown measures, giving some businesses whose revenues have dried up little choice but to cut jobs.
Separate figures released on Wednesday showed that inflation was 0.5 per cent in September, well below the Bank of England’s 2 per cent target.
Including housing, consumer price inflation came in at 0.7 per cent. The figures will put further pressure on the Bank to provide more stimulus to the economy, either by creating new money or cutting interest rates below zero for the first time.
Gertjan Vlieghe, one of nine members of the bank’s monetary policy committee, signalled in a speech on Tuesday that more intervention is likely to be needed.
He warned: “Given that virus prevalence has been increasing again recently, it is likely to weigh more heavily on economic activity.
“Indeed, it appears that the downside risks to the economic outlook are starting to materialise.”
The UK faces a “tremendous challenge ahead” with joblessness now forecast to be far higher than previously expected, Mr Vlieghe said.
“In my view, the outlook for monetary policy is skewed towards adding further stimulus.”