UK Government Spending : Should we expect further support?

Should the UK government deliver another economic support package ?

Tuesday's data release of Public sector finances for the financial year ending in March 2022 revealed that borrowing has halved compared to a year ago. The difference between how much the government spent vs. how much they received was £151.8bn in March this year compared to £317.6bn in the same month last year. This comes as the majority of the government's Covid economic response programs were largely phased out by autumn last year where two-thirds of the £169bn total expenditure on support schemes was expected to take place (1). 

As pressure mounts on the government to take provide financial support as living costs rise the majority of economists are confident in saying the government is in good standing to commit to further spending. Bethany Beckett, a UK Economist at Capital Economics commented that " there was likely to be a further fall in the deficit to around £100bn in 2022-23. As a result, the chancellor would have scope to use his autumn budget to respond to the cost of living crisis." This comes as public debt is at its highest levels since the 1960s (beat only by WW2) and borrowing is at the second highest since records began in 1947.

A recent article by the Financial Times reminds us that "the level of government borrowing was lower than the total of the five years following the 2007-08 global financial crisis, indicating a much more rapid economic recovery from the virus." Furthermore, central government receipts had increased by £105.3bn in March, now at £830bn. The research director at the Resolution Foundation, James Smith, commented that due to the "revenue rich" recovery, "the chancellor can have little reason not to provide much-needed policy support to families s they deal with the higher inflation and energy bills that are now hitting their finances." This begs the question, is the pace of economic recovery during the re-opening of the economy the wind behind the sails of future spending? 

In order to detangle the question, I propose we look at the present drag and drive factors in the UK economy. 

Drive Factors

• The unemployment rate has recovered remarkably well after Covid, at 3.9% in March down from 4.9% a year ago. This has certainly helped to increase government revenue as the majority of it comes from Pay As You Earn Income Tax (PAYE), which increased by £22.5bn in March from a year ago, totalling £191.0bn. This shows no signs of slowing as job vacancies continue to rise with half of the industry sectors showing record highs in February.

Drag Factors

• The inflation rate shows no real signs of slowing, with the last reading at 7.0% for March. This comes before the energy price cap rose in April, the second round effects of Russian sanctions and Ukraine war, as well as further supply chain disruptions as China struggles to contain an omicron outbreak. 
• Interest rates are rising (2) and another slash to near-zero rates appears unlikely as businesses unhesitatingly pass the rise in costs to consumers. 

We are beginning to see hints of the rise in prices causing households to cut discretionary spending in non-essential goods leading to more struggling businesses (monthly business insolvencies have risen by a third due to Creditors Voluntary Liquidation (CVLs). While this picture is still fairly faint and granular as the number of liquidations remain historically low, there is growing evidence of weakening household consumption, the main fuel for GDP, accounting for 59% of GDP in 2021. 

Two consecutive quarterly drops in GDP would result in a 'technical recession' which is unlikely to begin with Q1 this year as 0.8% growth in January and 0.1% growth in February would mean there has to be an over 0.9% drop in demand for March for negative quarterly growth. However, Q2 2022 could see negative growth as inflation continues to deteriorate consumer spending power unaided by government spending. 

Unlike the Great Recession between 2007-2009, unemployment benefits are unlikely to provide the cushion of support they once did. The government this time round has no obvious solutions in their toolbox to support the economy as shelves stay empty with supply chains disrupted and prices rising. It appears as though the government might need to pick up the can they have been long kicking down the road - greener policy. A more localised emphasis on supply chains and increased reliance on energy efficiencies and renewable energies could help to alleviate a lot of the burdens in the present economy. This is certainly a long-term strategy as piles of bureaucratic work appear to be the main barrier, for which Brexit was supposed to be the big solution. However, direction continues to remain unclear to many businesses that don't know "how much" to invest in these solutions with innovation for guidelines continuing to be left to the private sector markets to work out. Meanwhile as the economy runs through this Cost-of-living crisis the differences between the affected and unaffected will become more evident and divisive. 

Mooticity Exercises:

Question: If the CPI inflation index is formed of a 'representative' basket of goods, how can we deconstruct how different households with different baskets will be affected by rising prices?

(1) The Office for Budget Responsibility (OBR) provides us with the figures that show the majority of support went to households £100bn with the remaining £68bn going to business support schemes. In February, the payments for self-isolations ended followed by the Coronavirus Statutory Sick Pay Rebate Scheme and Kickstart scheme in March this year. Continuing to be supported by the government as a result of the Covid are the Recovery Loan Scheme and the Job Entry Targeted Support programme, both due to be phased out by June and September this year. 

(2) The cost of borrowing for the government is higher today than it was when the Covid economic stimulus packages were first announced. The yield for 10-year gilts stands at 1.817% compared to 0.801% a year ago. Furthermore as the government pays a mixture of conventional and inflation indexed bond of which the latter while it only makes up a third of outstanding debt it is pegged to the Retail Price Index (RPI) of inflation which currently stands at 9.9%.