Jeremy Hunt’s scope to cut taxes by about £20bn in his March budget has been boosted after the latest official figures showed UK government borrowing halving in the past year.
Data from the Office for National Statistics (ONS) showed that higher VAT and income-tax receipts coupled with lower spending resulted in a deficit of £7.8bn in December 2023 – the lowest for the month since the pre-pandemic year of 2019.
With lower debt-interest payments also contributing to the improvement in the government’s financial position, analysts said the prospects for a giveaway package had brightened.
The December deficit was more than £6bn lower than the £14bn pencilled in by the Office for Budget Responsibility – the independent watchdog responsible for the government’s fiscal and economic forecasts.
Despite the smaller than expected December deficit, in the first nine months of the financial year the government borrowed just over £119bn – £11bn more than in the same period of 2022-23 and the fourth highest on record. Borrowing in the first eight months of 2023-4 has been revised down by £4.2bn.
Hunt could use any windfall to cut taxes, increase public spending or pay down debt – or a combination of all three – but the chancellor dropped a broad hint when he attended last week’s World Economic Forum in Davos that he was planning a package of tax cuts in his 6 March budget. With opinion polls suggesting the Conservatives are on course for a landslide defeat, the budget is seen as one of the government’s last hopes of changing the political climate.
Another indication of Hunt’s room for manoeuvre will be provided by the January borrowing figures, traditionally a bumper month for income-tax receipts before the self-assessment deadline. For January 2023 the ONS reported a surplus – where tax receipts are higher than spending – of £7.4bn.
Ruth Gregory, the deputy chief UK economist at the analysts Capital Economics, said that after nine months of the 2023-24 fiscal year, borrowing was on track to undershoot the OBR’s full-year borrowing forecast of £123.9bn by £5bn.
“What’s more, with market interest rate expectations and long-dated gilt yields having fallen since November, we suspect the OBR will revise down its borrowing forecast significantly from 2025-26,” she added.
Hunt’s scope to cut taxes is constrained by his rule that debt should be falling as a share of national income in five years’ time, but Gregory said the latest data showed the chancellor would meet this target with about £20bn to spare. The ONS said debt was 97.7% of gross domestic product (GDP) in December – an increase of almost two percentage points compared with a year earlier.
Gregory said: “That will probably allow him to unveil a freeze in fuel duty in April 2024 (costing about £6bn a year) but perhaps also to announce more crowd-pleasing measures, such as a 1p cut to income tax (costing £6.9bn a year), while still maintaining fiscally prudent appearances.”
Laura Trott, the chief secretary to the Treasury, said: “Protecting millions of lives and livelihoods during Putin’s energy shock and a once in a century pandemic has created economic challenges. However, it is right that we pay back these debts so future generations are not left to pick up the tab.
“Because of this government’s decisive action, the economy is now beginning to turn a corner. Inflation has more than halved. Debt is on track to fall as a share of the economy. And we have been able to afford tax cuts for 27 million working people, and an £11bn tax cut to drive business investment.”
Cara Pacitti, a senior economist at the Resolution Foundation, said: “Lower-than-expected inflation late last year has reduced debt interest costs and given the chancellor a timely fiscal boost ahead of his budget in March.
“However, lower inflation is also likely to mean lower tax receipts. How these factors offset each other will be important in deciding how much fiscal headroom the chancellor has.”
