Case Study 4 - UK Public Sector Borrowing

Question 1

Public Sector Finances (2.5.3)

Using the case study, explain the difference between the UK’s fiscal deficit and national debt.

Answer 1

• Fiscal deficit: Short-term gap between government spending and revenue. In July 2024, borrowing was £3.1bn (Page 1), exceeding forecasts due to inflation and wage-driven costs.
• National debt: Cumulative total of past deficits. UK debt stands at 99.4% of GDP (Page 2), a post-1960s high due to COVID-19 spending.
• Case study link: “Fiscal deficit… £3.1bn in July” vs. “national debt… 99.4% of GDP” (Pages 1–2).

Question 2

Public Expenditure (4.5.1)

What factors drove the increase in UK public sector borrowing to £3.1bn in July 2024?

Answer 2

• Inflation: Higher costs for public services and benefits (“inflation… driving up running costs,” Page 1).
• Wage growth: Increased public sector wages to match living costs (“wage growth driving up running costs,” Page 1).
• Lower tax revenues: Revenues “marginally disappointed” OBR forecasts (Page 1).
• Case study evidence: July borrowing was “£1.8bn more than in 2023” (Page 1).

Question 3

Public Sector Finances (2.5.3)

How does the UK’s national debt (99.4% of GDP) impact fiscal policy?

Answer 3

• Reduced fiscal headroom: Headroom fell to £6bn (from £9bn in March 2024), limiting spending/tax flexibility (Page 2).
• Debt sustainability: Labour’s pledge to reduce debt/GDP in 5 years risks austerity or higher taxes (“raise taxes and borrow more,” Page 2).
• Case study link: “National debt… levels last seen in the early 1960s” (Page 2).

Question 4

Public Expenditure (4.5.1)

Why did UK public spending rise by £3.8bn in July 2024 compared to 2023?

Answer 4

• Inflation-linked costs: Benefits and public service spending adjusted for inflation (Page 3: “central government spending… continued to rise with inflation”).
• Debt interest reduction: Lower interest payments offset some costs (Page 3).
• Case study evidence: Total spending “up £3.8bn from July last year” (Page 3).

Question 5

Public Sector Finances (2.5.3)

Evaluate the challenges facing the Labour government in reducing the fiscal deficit.

Answer 5

• Structural issues: “Fiscal hole” of £22bn in unfunded commitments (Page 2).
• Economic growth risks: Slowing GDP may limit tax revenues (“expected slowing in GDP growth,” Page 2).
• Political constraints: Balancing austerity with public service demands.
• Case study link: “Tight fiscal backdrop” ahead of Budget (Page 3).

Question 6

Public Expenditure (4.5.1)

How might the Labour government address the fiscal deficit, according to the case study?

Answer 6

• Tax increases: “Raise taxes… to cover spending” (Page 2, Pantheon Macroeconomics).
• Borrowing: Temporary measures to fund pledges (“left the door open for more borrowing,” Page 2).
• Spending cuts: “Tough decisions” to prioritize fiscal rules (Page 2).
• Case study evidence: “National debt falling as a share of GDP within five years” (Page 2).