In only three years since modern records began in 1946 has the government borrowed more than was required to balance the books in the latest financial year. Even taking account of inflation, £139bn is a lot of money.
Predictably enough, that was the message from Jeremy Hunt after the release of the latest data for the public finances. Heavy borrowing had been the right thing to do in the face of two global shocks – the pandemic and the war in Ukraine – but it was not something that could go on for ever, he opined.
Publicly, at least, the chancellor is keen to say that his priority is to get to grips with the UK’s national debt and that the last thing on his mind is whether he will have the room to fund pre-election tax cuts.
But the clock is ticking and even if the government waits until the last possible moment polling day is only 20 months away. Inevitably, Hunt will be looking at the state of the public finances to see what room he has for manoeuvre.
In two important respects, things look brighter than they did when Hunt took over from Kwasi Kwarteng at the Treasury six months ago. First, fears last autumn that the economy was then in the early stages of a protracted recession have proved unfounded. Nobody in government is getting carried away, but the fact that output is now going sideways rather than going backwards is helpful for the public finances.
There is no guarantee that the economy will continue to show its current resilience. The City expects the Bank of England to raise interest rates for a 12th successive time next month and there is a risk that the cumulative impact of higher borrowing costs and falling living standards will become too much to bear. But as things stand, growth will be a bit stronger in 2023 than the -0.2% the Office for Budget Responsibility is expecting.
The second piece of good news for Hunt is that borrowing for 2022-23 has come in more than £13bn lower than the OBR pencilled in at the time of the March budget. Again, a word of caution is necessary. The deficit figure of £139bn for the last financial year is merely an estimate and it will almost certainly be revised as hard data comes in over the coming months. It is not set in stone.
That said, Hunt already has more options than he thought he had when he presented the budget little more than a month ago, and that scope will increase if the economy continues to beat expectations over the coming months
So what will the chancellor do with his extra leeway? The OBR said in its budget forecast that the chancellor was only just on course to meet his target of reducing national debt as a share of national output (GDP) in five years’ time, so he could be prudent and bank his unexpected windfall.
Alternatively, with the Conservatives a considerable distance behind Labour in the opinion polls, he could decide to use this year’s autumn statement and next spring’s budget for some voter-friendly measures.
To be sure, pre-election giveaways would mean borrowing comes down less quickly than currently expected, but that’s something that can be put off until another day. If the Conservatives lose the election, it won’t be Hunt’s problem anyway.
Ruth Gregory, of Capital Economics, says she expects tax cuts before the election followed by a tightening of policy immediately afterwards, whoever wins. That looks to be a pretty sound forecast. From a political perspective it’s a no-brainer.
