Jeremy Hunt has been given a short-term boost from the public finances after official figures showed government borrowing is close to £20bn lower than expected for the first six months of the current financial year.
Official figures showed public sector net borrowing in the six months to the end of September came in £19.8bn below the forecast made by the Office for Budget Responsibility at the March budget.
However, experts played down the potential for pre-election tax cuts or higher spending amid fears that a sharp rise in government borrowing costs would make it harder for the chancellor to meet his debt-cutting targets in five years’ time.
As next month’s autumn statement looms, hinting that he had little room for manoeuvre, Hunt said interest payments on government debt were twice as high last year compared with a year earlier.
“This is clearly not sustainable; we need to get debt falling and reduce public sector waste so that those delivering public services can get back to what they do best: teaching our children, keeping us safe and treating us when we’re sick,” said the chancellor, who is due to announce the autumn statement on 22 November.
Figures from the Office for National Statistics showed public sector net borrowing came in at £14.3bn in September, £1.6bn lower than the same month a year ago and below the estimates of City economists.
However, it was the sixth highest September deficit since monthly records began in 1993. Public sector net debt – the sum of every annual borrowing figure – rose to 97.8% of gross domestic product (GDP), 2.1 percentage points higher than the same month a year earlier, to continue at one of the highest levels since the 1960s.
September’s borrowing figure was influenced by a larger than expected fall in the retail prices index measure of inflation, to which index-linked government borrowing is pegged. This helped to reduce the Treasury’s debt servicing costs.
The exchequer also benefited from a sharp increase in tax receipts, helped by the government’s six-year freeze on income tax thresholds. Known as “fiscal drag”, the policy leads to more individuals paying higher rates of income tax.
Myron Jobson, a senior personal finance analyst at Interactive Investor, said: “The government’s stealth tax strategy continues to do its job in a big way, with tax takings remaining firmly on the upward trajectory.
“We’re facing the highest overall tax burden in a generation thanks to the deep freeze of tax thresholds and allowances, which, in tandem with wage inflation, means we’ll be more in tax in the years to come.”
Ashley Webb, a UK economist at the consultancy Capital Economics, said the chancellor could have some wriggle room “for a few pre-election giveaways” in next year’s March budget.
“But with the full upward impact on borrowing from higher interest rates and weaker GDP growth still coming down the line, any package of pre-election net tax cuts and/or spending rises will probably need to be modest.”
Interest rates have risen significantly more than forecast by the OBR in March amid persistent inflationary pressures, leading to 14 consecutive increases in the Bank of England base rate and an uptick in longer-term borrowing costs on the international markets.
At the March budget, the chancellor had £6.5bn of headroom against the government’s self-imposed target to reduce the national debt as a percentage of GDP by the fifth year of the OBR forecast. However, economists warn that soaring debt interest costs would make it harder to meet.
Cara Pacitti, a senior economist at the Resolution Foundation, said: “Short-term gain is likely to be more than offset by longer-term pain as the impact of higher interest rates continues to push up borrowing costs over the coming years.
“Together, this is likely to reduce the chancellor’s already limited room for manoeuvre as he uses his autumn statement to prepare the economic pitch for next year’s general election.”
Britain’s long-term borrowing costs rose on Friday, with the yield, or interest rate, on UK 30-year government debt reaching the highest in 25 years. The yield on the benchmark 30-year gilt hit 5.13%, the highest since 1998, amid a wider sell-off in government bonds.
