The UK government borrowed less in December than was expected, which is a boon to chancellor Jeremy Hunt’s plans to reduce taxes in advance of the expected general elections this year.
According to the Office for National Statistics, the borrowing of the public sector fell to £7.8bn in December last year. This is about half what it was a year ago and the lowest amount for a month since 2019.
The Office for Budget Responsibility’s prediction of £14bn for the month is significantly lower than that.
Hunt wants to give more money away before the election because the Conservative Party consistently trails Labour in polls.
Hunt reduced business and personal tax by £20bn in November’s Autumn statement, but the projected tax burden continued to rise.
Since then, the chancellor and Rishi Sunak, the Prime Minister have been touting pre-election taxes in the upcoming Budget. They are banking on gaining extra “headroom”, against the UK’s important fiscal rule that requires the ratio between public debt and gross domestic product to fall in five years.
The Autumn Statement included a number of budgetary decisions, including those on welfare, which left the chancellor with a projected £13bn in headroom. The economists believe that this fiscal flexibility could be increased due to lower debt interest.
The markets are betting on lower borrowing rates amid hopes that Bank of England will reduce official interest rates from their 15-year high of 5,25 per cent this year.
ONS reported that the government’s interest payment on debt last month was lowest since 2020, as inflation falls and payments for index-linked gilts are reduced.
Ruth Gregory, an economist at Capital Economics, stated that the government’s borrowing after nine months in the fiscal year of 2023-24 was on course to fall short of the OBR’s full-year forecast of borrowing of £123.9bn.
She said that due to lower expectations of interest rates, the chancellor could end up with fiscal room of around £20bn for the March Budget. This would allow him to announce “crowd pleasing measures” like a 1p reduction in income tax which would cost £7bn per year.
Hunt’s headroom will be determined by the OBR’s forecasts of economic and fiscal conditions in the weeks leading up to the Budget of March.
Laura Trott said that the economy “now begins to turn the corner” and added that inflation has more than halved. Consumer prices rose by 4 percent in December, down from more than 10% a year ago.
She said that “debt as a percentage of the economy is on course to decline.” “We have also been able afford to cut taxes for 27mn workers, as well as an £11bn tax reduction to encourage business investment.”
The public sector net debt (excluding state-owned bank) is still on the rise. In December, it stood at £2,69tn or about 97.7% of GDP – higher than the ratio one year ago.
Neville Hill of Hybrid Economics said that given UK’s high debt and large budget deficit, a substantial tax cut now without funding would be “reckless”. This could endanger public finances.
He added that “a responsible chancellor” would use the upcoming Budget to present a framework of fiscal consolidation for the next few year.