Jeremy Hunt’s plans to cut taxes before the election have been stymied after higher benefits spending and lower tax revenues pushed government borrowing over £20bn in July.
The Office for National Statistics said that the Budget Deficit, the gap between tax receipts and public expenditures was £1.5bn more than it had been a year ago. It is the fourth largest April deficit since records began.
Hunt relies on an improved state of public finances before the voters head to the polls to justify tax reductions. However, the latest figures reveal that they are in a worse condition than predicted at the time the budget was presented in March.
The Office for Budget Responsibility (OBR) reported that April’s deficit had been £1.2bn more than they predicted. This overshoot was caused by increased Whitehall spending, benefits increases, and weaker taxes revenues.
Hunt’s second reduction in National Insurance Contributions (NICs) was introduced last month. The OBR also said that it revised its estimate for the deficit in 2023-4 by £0.8bn.
Grant Fitzner is the chief economist at ONS. He said that while central government expenditure and income have both increased since this time last, a drop in NICs has meant receipts are not growing as fast as spending.
The annual increase in the benefit expenditures offset the decrease in energy support spending.
In April, the debt as a percentage of national income was 97.9%. This is the highest since the 1960s. It has risen by 2.5 percentage points in the last year.
Analysts say that the data for April’s public finances further reduces Hunt’s already limited options for tax reductions without violating his self-imposed rule, which states that debt as a percentage of national income should fall within five years.
Rob Wood, UK chief economist at Pantheon Macro said: “The headroom for tax cuts doesn’t exist but chancellor Hunt appears likely to proceed anyway in an autumn statement pre-election, probably in September.
Hunt plans implausibly low expenditures to create his tax-cutting space.
Peter Arnold, Chief Economist at EY UK said that he expected April’s poor performance to continue through the remainder of the 2024-05 financial year. The yields on government bonds, and the official interest rate are likely to be higher that the assumptions made in the OBR March forecast. This will result in higher debt servicing costs than expected.
Arnold stated that “some of these impacts are likely to last until the end of OBR’s forecasting horizon of five years, reducing the already slim headroom in relation to the main fiscal rule of the government.”
The International Monetary Fund warnedHunt on Tuesday against tax cuts before elections and warned of a £30bn gap in the public finances.
A Treasury spokesperson stated: “We protected millions of jobs in Covid, and we paid half the energy bills of people after Putin’s invasion sent them skyrocketing. But it would not be fair to leave future generation to pay for this.
“That is why we need to stick to our plan in order to reduce debt.”
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