Public sector finances, UK: August 2021

Other commentary from the latest public sector finances data can be found on the following pages:

• Recent and upcoming changes to public sector finance statistics: August 2021
• UK government debt and deficit: March 2021

• Public sector net borrowing (excluding public sector banks, PSNB ex) was estimated to have been £20.5 billion in August 2021; this was the second-highest August borrowing since monthly records began in 1993, but £5.5 billion less than in August 2020.

• Central government receipts in August 2021 were estimated to have been £61.2 billion, £5.3 billion more than in August 2020, while central government bodies spent £79.6 billion in August 2021, £1.0 billion less than in August 2020.

• Public sector net borrowing (PSNB ex) was estimated to have been £93.8 billion in the financial year-to-August 2021; this was the second highest financial year-to-August borrowing since monthly records began in 1993, £88.9 billion less than in the same period last year.

• Public sector net borrowing (PSNB ex) was estimated to have been £325.1 billion in the financial year ending March 2021, an increase of £27.1 billion compared with our previous estimate; largely as a result of recording, for the first time, expected expenditure of £20.9 billion on calls under the government loan guarantee schemes.

• Public sector net debt (excluding public sector banks, PSND ex) was £2,202.9 billion at the end of August 2021 or around 97.6% of GDP, the highest ratio since the 98.3% recorded in March 1963.

• Central government net cash requirement (excluding UK Asset Resolution Ltd and Network Rail) was £8.5 billion in August 2021, £13.2 billion less than in August 2020, bringing the total for the financial year-to-August 2021 to £84.0 billion.

The coronavirus (COVID-19) pandemic has had a substantial impact on the economy and on public sector borrowing and debt.

Central government tax and National Insurance receipts combined in the financial year ending (FYE) 2021 were £670.8 billion, a fall of £32.5 billion, compared with the same period a year earlier. Government support for individuals and businesses during the coronavirus pandemic contributed to an increase of £204.4 billion in central government day-to-day (or current) spending, bringing the total to £942.5 billion.

As a result of these low receipts and high expenditure, provisional estimates indicate that in FYE 2021, the public sector borrowed £325.1 billion. This is equivalent to 15.5% of the UK’s gross domestic product (GDP), the highest such ratio since the end of World War Two, when it was 22.4% in FYE 1945.

In total, more than 50 schemes have been announced by the UK government and the devolved administrations to support individuals and businesses during the coronavirus pandemic. Our article Recent and upcoming changes to public sector finance statistics: August 2021 and earlier editions of this article discuss the largest of the coronavirus schemes by implementation status within the public sector finances.

The extra funding required by government coronavirus support schemes, combined with reduced cash receipts and a fall in GDP, have all helped to push public sector net debt as a ratio of GDP to levels last seen in the early 1960s. Public sector net debt (excluding public sector banks, PSND ex) at the end of August 2021 was equivalent to 97.6% of GDP.

The public sector spent more than it received in taxes and other income in August 2021, requiring it to borrow £20.5 billion, the second-highest August borrowing on record.

Analysis of the components of borrowing in August 2021

Central government is the largest sub-sector of the public sector and therefore changes in central government receipts and expenditure usually have the most influence on public sector net borrowing. Public sector finances tables 1 to 10: Appendix A provide further information.

Central government receipts

Central government receipts in August 2021 were estimated to have been £61.2 billion, a £5.3 billion increase compared with August 2020. Of these receipts, tax revenue increased by £4.1 billion to £45.0 billion.

In the most recent months, tax receipts recorded on an accrued (or national accounts) basis have been subject to some uncertainty. This is because many taxes such as Value Added Tax (VAT), Corporation Tax and Pay As You Earn (PAYE) Income Tax contain some forecast cash receipts data and are liable to revision when actual cash receipts data are received.

The period of uncertainty is longer for taxes with coronavirus (COVID-19) deferral schemes, such as VAT, and data for these taxes will be provisional for longer than usual.

Corporation Tax

Corporation Tax receipts in recent months have been higher than those published in the Office for Budget Responsibility’s (OBR) Economic and fiscal outlook (EFO) – March 2021.

We have compared the forecast and actual cash receipts for June 2021 to inform an exceptional upward adjustment to the forecast cash receipts in September 2021. This influences both our July and August 2021 provisional estimates of corporation tax receipts on an accrued (National Accounts) basis.

We will continue to review this adjustment and apply similar adjustments if required.

From April 2021, Corporation Tax estimates have been affected to some extent by the introduction of the super-deduction capital allowance, providing tax incentives for companies to invest in qualifying new plant and machinery assets – our Public sector classification guide and forward work plan provides more information. The rate of uptake of this scheme is not yet clear, adding further uncertainty to the profile of Corporation Tax receipts in recent months.

Self-assessed tax receipts

In August (and February), accrued receipts are usually boosted by late payments of self-assessed taxes due in July (and January) each year. This month, self-assessed Income Tax receipts were £2.2 billion, £0.3 billion more than in August 2020.

When making year-on-year comparisons it is important to consider the impact of the government’s deferral schemes in place last year, which have impacted on the usual monthly payment profile. It is advisable to look at the combined self-assessed Income Tax receipts across the whole financial year when drawing conclusions from year-on-year comparisons.

Central government expenditure

Central government bodies spent £79.6 billion in August 2021, £1.0 billion less than in August 2020.

Interest payments on debt by central government

Interest payments on central government debt were £6.3 billion in August 2021, £2.9 billion more than in August 2020 but £2.3 billion less than the monthly record of £8.6 billion in June 2021.

The recent high levels in debt interest payments are largely a result of movements in the Retail Prices Index (RPI) to which index-linked gilts are pegged. To estimate the RPI uplift for 3-month lagged index linked gilts in August 2021, we reference the RPI movement between May and June 2021, with the most recent RPI not yet feeding into the estimate.

While any RPI uplift will impact on accrued expenditure (as used in the calculation of borrowing) it will not be wholly reflected in the central government net cash requirement in the near term. These movements are reflected in the government’s liabilities, which will be realised as the existing stock of index-linked gilts is redeemed.

Central government expenditure on procurement and pay

Central government departments spent £29.5 billion on goods and services in August 2021, an increase of £1.5 billion from August 2020.

Spending in this area includes £16.5 billion on procurement and £12.7 billion in pay. This cost includes the expenditure by the Department of Health and Social Care (DHSC), devolved administrations and other departments in response to the coronavirus pandemic including the NHS Test and Trace programme and the cost of vaccines.

Transfers to local government

Central government current transfers to local government were £9.0 billion in August 2021, an increase of £0.8 billion compared with August 2020. In part, these payments enable local authorities to fund coronavirus policies.

Current and capital transfers between central government and local government are based on administrative data supplied by HM Treasury and have no impact at the public sector level.

Job furlough schemes

The combined cost of the job furlough schemes, Coronavirus Job Retention Scheme (CJRS) and Self Employment Income Support Scheme (SEISS), has fallen in each month of the current financial year, compared with the same month a year earlier. These schemes are due to close in September 2021.

The public sector borrowed £93.8 billion in the financial year-to-August 2021, £88.9 billion less than in the same period a year earlier.

Official forecasts suggest that borrowing may reach £233.9 billion by the end of the financial year ending (FYE) 2022, £91.2 billion less than the £325.1 billion borrowed in the FYE 2021.

Borrowing had generally been falling since its peak of £157.8 billion during the economic downturn in FYE March 2010. However, largely as a result of the impact of the coronavirus (COVID-19) pandemic, the £325.1 billion borrowed in FYE March 2021 was double this previous record.

Analysis of the components of borrowing in financial year-to-August 2021

Central government is the largest sub-sector of the public sector and therefore changes in central government receipts and expenditure usually have the most influence on public sector net borrowing. Public sector finances tables 1 to 10: Appendix A provide further information.

Central government receipts

Central government receipts in the financial year-to-August 2021 were estimated to have been £314.7 billion, a £42.5 billion increase compared with the same period in 2020. Of these receipts, tax revenue increased by £39.4 billion to £232.3 billion.

Central government expenditure

Central government day-to-day (or current) spending was estimated to have fallen by £29.3 billion to £382.7 billion, in financial year-to-August 2021 compared with the same period a year earlier.

Transfers to local government

Central government current transfers to local government were £62.2 billion in the financial year-to-August 2021, £7.7 billion less than in the same period a year earlier. Some coronavirus-related current grants that have been paid by central to local government have either not been spent or have not yet been fully reflected in our estimates of local government spending.

The central government net cash requirement (CGNCR), excluding UK Asset Resolution Ltd and Network Rail, is the amount of cash needed immediately for the UK government to meet its obligations. To obtain cash, the UK government sells financial instruments, gilts or Treasury Bills.

The amount of cash required will be affected by changes in the timing of tax payments by individuals and businesses, but does not depend on forecast tax receipts in the same way as our accrued (or national accounts) based measures.

The CGNCR consequently contains the timeliest information and is less susceptible to revision than other statistics in this release. However, as for any cash measure, the CGNCR does not reflect the overall amount for which the government is liable or the point at which any liability is incurred – it only reflects when cash is received and spent.

Public sector net debt represents the amount of money the public sector owes to private sector organisations (including overseas institutions). When the government borrows, this normally adds to the debt total, but it is important to remember that reducing borrowing (the deficit) is not the same as reducing the debt.

Public sector net debt (excluding public sector banks, PSND ex) stood at £2,202.9 billion at the end of August 2021, an increase of £184.2 billion compared with the same point last year.

Over the course of the coronavirus (COVID-19) pandemic, the increase in debt and a fall in gross domestic product (GDP) have helped push public sector net debt as a ratio of GDP to levels last seen in the early 1960s. Debt is now a ratio of GDP currently standing at 97.6% at the end of August 2021.

Central government gilts

Debt represents the amount of money owed by the public sector to the private sector and is largely made up of gilts (or bonds) issued to investors by central government.

There were £1,960.4 billion of central government gilts in circulation at the end of August 2021 (including those held by the Bank of England (BoE) Asset Purchase Facility Fund). This comprised of £1,483.9 billion in conventional gilts and £476.4 billion in index-linked gilts (at redemption value).

These gilts are auctioned by the Debt Management Office (DMO), on behalf of central government in accordance with its financing remit.

The Bank of England’s contribution to debt

This month we have improved our recording and presentation of the BoE’s contribution to public sector net debt, using more granular published data in our calculations and in our presentation table.

Our presentation of the BoE’s contribution to net debt can be found in Table PSA9A in our Public sector finances tables 1 to 10: Appendix A.

The BoE’s contribution to debt is largely a result of its quantitative easing activities through the Asset Purchase Facility (APF) and Term Funding Schemes (TFS).

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of August 2021 would reduce by £236.3 billion (or 10.5 percentage points of GDP) to £1,966.6 billion (or 87.1% of GDP).

The estimated impact of the APF’s gilt holdings on debt currently stands at £114.3 billion, representing the difference between the value of the reserves created to purchase gilts (or market value of the gilts) and the £723.4 billion face (or redemption) value of the gilts purchased.

The total corporate bond holdings of the APF at the end of August 2021 stood at £19.7 billion, adding an equivalent amount to the level of debt.

The loan liability under the TFS umbrella at the end of August 2021 stood at £109.9 billion, adding an equivalent amount to the level of debt.

Assets purchased under the TFS and Term Funding Schemes incentives for small and medium-sized enterprises (TFSME) fall outside the boundary of public sector net debt excluding public sector banks (PSND ex). Those users who are interested in wider measures of the public sector balance sheet may find estimates of public sector net financial liabilities (PSNFL) of interest. This presentation will be updated on 21 October 2021 to reflect our improvements to the recording of BoE balance sheet data.

Special Drawing Rights

Some International Monetary Fund (IMF) member countries have access to international reserve assets called Special Drawing Rights (SDRs). A general allocation of SDRs equivalent to approximately US$650 billion became effective on 23 August 2021 and was allocated to participant countries in proportion to their existing quotas. The UK’s SDR allocation was equivalent to $19,318 million, and was received in August 2021.

According to statistical guidance, Special Drawing Rights are recorded as both a financial asset and an equivalent financial liability. However, there is more than one definition for debt. Public Sector Net Debt (PSND) does not include the liability category for SDRs, but PSND does include the asset category for Official Reserves, which is where the UK’s SDR allocation is held. This means that the new SDR allocation has reduced PSND in August by around £18.7 billion.

The new SDR allocation has no impact on Public Sector Net Financial Liabilities, because it uses a wider definition where the SDRs are counted as both assets and liabilities. There is no impact on either Public Sector Net Borrowing or Central Government Net Cash Requirement.

The data for the latest months of every release contain a degree of forecasts; subsequently, these are replaced by improved forecasts as further data are made available and finally by outturn data.

The coronavirus pandemic has had a substantial impact on both tax receipts and expenditure. These impacts are likely to be revised further as the full effects of the coronavirus pandemic on the public finances continue to become clearer.

This month we have introduced a series of methodolgical improvements that have resulted in extended revisions to our previous estimates of both public net borrowing and net debt.

These changes are presented in Section 9 – Changes to public sector finance statistics introduced in September 2021.

A further, more extensive data presentation is available in Appendix K: Changes to public sector finance statistics implemented in September 2021.

Our article Recent and upcoming changes to public sector finance statistics: August 2021 explains many of these in detail.

Revisions to net borrowing in the financial year-to-July 2021

Since our last publication (20 August 2021), we have reduced our estimate of borrowing in the financial year-to-July 2021 by £4.7 billion.

Of this, local government borrowing has reduced by £5.2 billion. Previously, our local government data were based on the latest official forecasts published by the Office for Budget Responsibility (OBR) on 3 March 2021. This month, we have received budget data for England, Scotland and Wales, that we have used to improve our initial estimates.

Central government borrowing has reduced by £2.5 billion. This was largely the result of updated source data. Previous estimates of central government tax receipts increased by £2.3 billion, of which VAT receipts increased by £1.5 billlion.

Public sector funded pensions borrowing has increased by £2.6 billion. These data are updated annually and replace initial estimates.

Revisions to borrowing in the financial year ending March 2021

Since our last publication (20 August 2021), we have increased our estimate of borrowing in the financial year ending (FYE) 2021 by £27.1 billion. This has largely been as a result of recording, for the first time, expected expenditure of £20.9 billion on calls under the government loan guarantee schemes. This loan provision, recorded as central government capital expenditure, has increased central government borrowing by £20.9 billion over this period. This estimate of £20.9 billion is based on provisional data.

Additionally, our annual update of public sector funded pensions data has increased borrowing by £6.2 billion across the FYE 2021.

Revisions to borrowing in earlier financial years

Our annual update of public sector funded pensions data has revised estimates from April 1997 to date, although these revisions are more material in the latest six financial years, generally increasing net borrowing (and reducing net debt).

The revisions to the components of central and local government borrowing are summarised in Public sector finances tables 1 to 10: Appendix A.

Revisions to public sector net debt

This month we have reduced our previous estimate of the level of debt at the end of July 2021 by £14.5 billion from that published on 20 August 2021. This change is largely the result of new data for public sector funded pensions, replacing our initial estimates. Pensions estimates are updated annually, and our latest estimate of the impact of these schemes on public sector net debt at the end of July 2021 has reduced by £12.5 billion.

The revisions to our debt aggregates are presented in Public sector finances tables 1 to 10: Appendix A.

In accordance with our transparency strategy and to provide increased predictability to users, we aim to package together methodological changes so that they occur, where possible, at a single point in the year.

While we outline these changes here, our article Recent and upcoming changes to public sector finance statistics: August 2021 explains many of these in detail.

Methodology changes

This month, we have made several improvements to our estimates. These include the recording of the following items for the first time:

• the government loan guarantee schemes (Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme and the Bounce Back Loan Scheme)
• the train operating companies under Emergency Measures Agreements as a part of the public sector
• the Future Fund which offered convertible loans to eligible companies affected by the coronavirus (COVID-19) pandemic
• the sale of the central government-owned railway arches

Of these, the most notable revision to public sector net borrowing was a result of the recording of the expected loss under the government loan guarantee schemes.

We have recorded this expenditure in the form of a capital transfer at the time the guarantees were provided, reflecting estimated losses under the schemes over their lifetimes.

We have provisionally estimated that this expenditure at inception has contributed to an increase in public sector net borrowing of £20.9 billion in financial year ending (FYE) 2021 and £0.5 billion in FYE 2022.

For all the methodology changes listed in this section, any impact on cash payments or receipts will already have been reflected in the latest estimates (of public sector net debt and central government net cash requirement).

Continuous improvement

We have improved our recording and presentation of Bank of England (BoE) contribution to net borrowing, net cash requirement and net debt, using more granular published data in our calculations and in our presentation table.

We now consolidate gilts held by the BoE’s Issue and Banking Departments at face value consistent with the approach we apply to other public sector bodies.

We have reviewed the data sources for the BoE Asset Purchase Facility (APF) Fund and moved from estimates based on management information to published data sources. Our review verified the published monthly data by referring to audited accounts, and concluded that where available, published data sources should be used in preference to management information.

Our review has had little effect on our estimate of the BoE contribution to public sector net borrowing, however these changes have caused often substantial revisions to the profile of net debt over the period February 2015 to date.

We estimate that the BoE contribution to public sector net debt at the end of July 2021 has been revised down by £0.3 billion to £225.0 billion as a result of these changes and the incorporation of the latest data.

Our new presentation of the BoE contribution to public sector net debt can be found in Table PSA9A in our Public sector finances tables 1 to 10: Appendix A.

Annual data updates

Our regular annual updates of data for Network Rail, Pool Re, public sector funded pensions, student loans and capital consumption also take effect this month.

Of these, the updates for public sector funded pensions estimates have the most noticable impact. Although the pensions figures have been revised from April 1997 to date, the impact is more material in the latest six financial years, generally increasing net borrowing and reducing net debt.

Tables 12 and 13 present the estimated impact of the key methodological improvements and data updates introduced in September 2021, based on the latest estimates of public sector net borrowing and debt, respectively.

A further, more extensive presentation of the estimated impacts of our planned September 2021 methodological and data changes is available in Appendix K: Changes to public sector finance statistics implemented in September 2021.

Public sector

In the UK, the public sector consists of six sub-sectors: central government, local government, public non-financial corporations, public sector pensions, the Bank of England (BoE) and public financial corporations (or public sector banks).

Public sector current expenditure

Current expenditure measures reflect the cost of the public sector’s day-to-day activities. For example, in the case of central government these include:

• providing services and grants (for example, related to education, defence, and health and social care) – including the current job furlough schemes
• payment of social benefits (such as pensions, unemployment payments, Child Benefit and Statutory Maternity Pay)
• payment of the interest on the government’s outstanding debt

Public sector debt interest to revenue ratio

The debt interest to revenue ratio (DIR) represents the proportion of net interest paid (gross interest paid less interest received) by the public sector (excluding public sector banks), compared with the non-interest receipts it receives in a given period.

Public sector current budget deficit

Public sector current budget is the difference between revenue (mainly from taxes) and current expenditure, on an accrued (or national accounts) basis; it is the gap between current expenditure and current receipts (having taken account of depreciation). The current budget is in surplus when receipts are greater than expenditure.

Public sector net investment

Public sector net investment is the sum of all capital spending, mainly net acquisitions of capital assets and capital grants, less the depreciation of the stock of capital assets.

Public sector net borrowing

Public sector net borrowing excluding public sector banks (PSNB ex) measures the gap between revenue raised (current receipts) and total spending (current expenditure plus net investment (capital spending less capital receipts)). PSNB is often referred to by commentators as “the deficit”.

Public sector net cash requirement

The public sector net cash requirement (PSNCR) represents the cash needed to be raised from the financial markets over a period of time to finance the government’s activities. This can be close to borrowing (the deficit) for the same period; however, there are some transactions, for example, loans to the private sector, that need to be financed but do not contribute to the deficit. It is also close but not identical to the changes in the level of net debt between two points in time.

Public sector net debt

Public sector net debt excluding public sector banks (PSND ex) represents the amount of money the public sector owes to private sector organisations including overseas institutions, largely as a result of issuing gilts and Treasury Bills, minus the amount of cash and other short-term assets it holds. PSND is often referred to by commentators as “the national debt”.

Public sector banks

Unless otherwise stated, the figures quoted in this bulletin exclude public sector banks, currently only the NatWest Group (formerly the Royal Bank of Scotland (RBS) Group).

The reported position of debt, and to a lesser extent, borrowing, would be distorted by the inclusion of NatWest Group’s balance sheet (and transactions). This is because the government does not need to borrow to fund the debt of NatWest Group, nor would surpluses achieved by NatWest Group be passed on to the government, other than through any dividends paid as a result of the government equity holdings.

Other important terms commonly used to describe public sector finances are listed in the Public sector finances glossary.

Gross domestic product

Gross domestic product (GDP) measures the value of goods and services produced in the UK. It estimates the size of and growth in the economy.

GDP used to present debt and other headline measures are partly based on provisional and official forecast data. Our August 2021 estimate of monthly GDP requires data across five quarters of GDP. Of these, two are based on the GDP first quarterly estimate published by the Office for National Statistics (ONS) on 12 August 2021 and three are based on the latest official forecasts published by the Office for Budget Responsibility (OBR) on 3 March 2021.

Comparisons with official forecasts

The independent Office for Budget Responsibility (OBR) is responsible for the production of official forecasts for the government. These forecasts are usually produced twice a year, in spring and autumn.

Borrowing in the financial year ending (FYE) 2021 was £29.5 billion less than the £354.6 billion expected by the OBR in their Economic and Fiscal outlook – March 2021.

The Autumn Budget 2021 (and publication of the next OBR forecast) has been announced as 27 October 2021.

Exceptional adjustments applied to tax data

The data used to inform receipts on a national accounts basis are largely consistent with the OBR Economic and fiscal outlook (EFO) – March 2021 and the latest set of supporting monthly data profiles published 21 July 2021 (XLS, 107KB). Where necessary, and if there is sufficient information, further adjustments are made to estimate the impact of the coronavirus (COVID-19) pandemic.

Further details of the methods used to estimate the effect of coronavirus on receipts were provided in Section 12 of Public sector finances, UK: March 2021.

In both July and August 2021, we applied an exceptional adjustment to our corporation tax data to partially account for its recent performance above that expected in the OBR’s Economic and fiscal outlook (EFO) – March 2021.

We will continue to review this adjustment and apply similar adjustments if required.

Local government and public corporations

In recent years, planned local government expenditure initially reported in local authority budgets has been systematically higher than the final outturn expenditure reported in the audited accounts. We therefore include adjustments, usually to reduce the amounts reported at the budget stage.

For FYE 2021 we include:

• a £0.4 billion downward adjustment to Wales’ capital expenditure
• an £8.5 billion upward adjustment to England’s current expenditure on goods and services, as the budget forecasts on which these are based were prepared before the coronavirus pandemic

We apply a further £1.5 billion downward adjustment to budget forecast current expenditure on benefits in FYE 2021, to reflect the most recently available data for housing benefits.

For FYE 2022 we include:

• a £0.5 billion downward adjustment to Scotland’s capital expenditure
• a £0.4 billion downward adjustment to Wales’ capital expenditure
• a £6.0 billion upward adjustment to England’s current expenditure on goods and services

We apply a further £0.6 billion downward adjustment to budget forecast current expenditure on benefits in FYE 2022, to reflect the most recently available data for housing benefits.

Public corporations’ data in the most recent periods are initial estimates, largely based on the Office for Budget Responsibility (OBR) Economic and fiscal outlook (EFO) – March 2021, with adjustments being applied as needed. Data supplied by the Department for Transport have been used in implementing the reclassification of train operating companies under emergency measures for the FYE 2021.