Chancellor of the Exchequer Jeremy Hunt has received a temporary fiscal boost as the latest official data reveals that UK government borrowing is nearly £20 billion less than initially projected for the first half of the current fiscal year
These figures, covering the six months up to the end of September, indicate a public sector net borrowing that is £19.8 billion lower than what was forecasted by the Office for Budget Responsibility in March.
Despite this positive development, experts are cautious about the possibility of implementing pre-election tax reductions or increased government spending. Concerns stem from the potential impact of a significant rise in government borrowing costs, which could pose challenges for the chancellor in meeting his debt reduction goals over the next five years.
As the autumn statement for the next month approaches, Jeremy Hunt hinted at limited flexibility in his fiscal policies. He pointed out that interest payments on government debt have doubled compared to the previous year, highlighting the need to reduce debt and minimize waste in the public sector to allow those providing public services to focus on their core responsibilities, such as education, security, and healthcare.
Statistics from the Office for National Statistics indicate that in September, public sector net borrowing stood at £14.3 billion, which is £1.6 billion lower than the same month in the previous year and below the predictions of financial experts. Nevertheless, it marked the sixth-highest September deficit since monthly records began in 1993. Public sector net debt, representing the cumulative annual borrowing figures, increased to 97.8% of the gross domestic product (GDP), 2.1 percentage points higher than the same month in the previous year, maintaining one of the highest levels since the 1960s.
The September borrowing figure was influenced by an unexpected decrease in the retail prices index measure of inflation, which is linked to index-linked government borrowing, thus reducing the Treasury’s debt servicing costs.
Moreover, the government benefited from a substantial rise in tax revenues, thanks in part to the six-year freeze on income tax thresholds, a policy known as “fiscal drag.” This policy resulted in more individuals paying higher rates of income tax.
Financial analysts have noted that the government’s stealth tax strategy, coupled with wage inflation, has led to the highest overall tax burden in a generation. This tax burden is expected to continue increasing in the coming years.
While there may be room for some pre-election fiscal incentives in the upcoming March budget, the chancellor is likely to exercise caution, considering the potential impact of higher interest rates and weaker GDP growth on borrowing in the future.
Interest rates have risen more than anticipated since March, primarily due to persistent inflationary pressures, resulting in 14 consecutive increases in the Bank of England’s base rate and higher long-term borrowing costs in international markets. In the March budget, the chancellor had £6.5 billion of fiscal headroom against the government’s self-imposed target of reducing the national debt as a percentage of GDP by the fifth year of the Office for Budget Responsibility’s forecast. However, economists warn that increasing debt interest costs could pose challenges in meeting this target.
Cara Pacitti, a senior economist at the Resolution Foundation, highlights that any short-term gains are likely to be offset by long-term challenges posed by higher interest rates. These challenges could limit the chancellor’s room for maneuver as he prepares the economic groundwork for the next year’s general election in his autumn statement.