The government recouped record revenues in January but the public finances were not as healthy as expected at the start of the year, delivering a blow to Jeremy Hunt’s ambitions to offer generous tax giveaways at next month’s budget.
The Office for National Statistics said the public finances recorded a monthly surplus of £16.7 billion in January, the largest figure since equivalent records began in 1993, but undershooting a forecast of £18.2 billion made by the Office for Budget Responsibility, and below economists’ projections of £18.5 billion.
The figures mark the fifth consecutive month in which data on the public finances has fallen below forecasts, underscoring the challenges facing the chancellor, who plans to announce tax cuts for workers in a pre-election budget on March 6.
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January is often the only month in the calendar year that the government boasts a monthly surplus in revenues, as self-assessment taxes are recorded at the start of the year. The Office for National Statistics said part of the undershoot was due to lower than expected self-assessment revenues, which came in at £21.6 billion last month, £2.4 billion below forecasts from the OBR. Further self-assessment tax revenues will be counted in February’s public finances data.
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In better news for the public finances, the government is paying out lower debt interest payments on its inflation-linked borrowing due to falling price growth and recorded a small decline in public spending compared with the same period last year due to the phasing out of energy support payments for households and businesses.
Jessica Barnaby, the ONS’s deputy director for the public sector, said the January surplus was “the largest in nominal terms since monthly records began in 1993, although borrowing in the year to January is only slightly lower than the same period last year”.
She added: “With recent reductions in the retail price inflation rate, interest payable on government gilts and without last year’s energy support schemes, overall expenditure was down on this time last year, despite increased spending on public services and benefits.”
Total borrowing in the first nine months of the fiscal year stands at £113.3 billion, below the £124 billion that the OBR expected at this stage in the financial calendar. The undershoot is welcome news for the chancellor who has promised to reduce the record tax burden at the spring budget but his room for pre-election giveaways has been limited by a worsening in interest rate expectations this year.
The OBR, the government’s independent fiscal watchdog, will calculate how much fiscal headroom the chancellor has to meet his target to reduce the debt ratio within the next five years. This figure will determine the scope and generosity of potential tax cuts at the budget.
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Ella Henderson, economist at Investec, said the January tax surplus figures were “slightly disappointing” for Hunt, and will “eat into some of the extra headroom” he would have hoped to use to fund tax cuts for households next month. “Depending on the findings from the OBR we may see an element of expectation management from the chancellor over the coming days, which will hint as to how favourable or unfavourable the latest estimates are,” she said.
Treasury officials have warned that the chancellor is hemmed in by a shift in market expectations for interest rate cuts, which have been pushed back from March to June. These small changes can wipe off billions of pounds from Hunt’s fiscal headroom projection, which stood at just £13 billion last November.
Ruth Gregory, deputy chief UK economist at Capital Economics, said Hunt would be forced into a “smaller net giveaway than November’s £21 billion of about £10 billion (or 0.4 per cent of GDP) and that he will have to resort to a further squeeze on public spending to meet his fiscal rules.”
Watchdog’s data will determine scope for tax cuts
Jeremy Hunt, the chancellor, received documents from his fiscal watchdog this week that will determine how much tax cutting largesse he can wield at next month’s spring budget (Mehreen Khan writes).
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The Office for Budget Responsibility has for the last four weeks been sending updated estimates to the Treasury on the size of the government’s fiscal headroom, a figure which shows how much space the chancellor has to spend while sticking to his main budgetary rule to bring down the debt ratio within five years.
The size of the headroom, which has shifted by billions of pounds in recent weeks, will either help Hunt deliver major tax breaks to workers in the form of an income tax cuts or instead force him into more modest measures that may need to be paid for by reining in public spending in future years, when his party is unlikely to be in power.
Treasury officials say the watchdog’s estimates have become more pessimistic, falling from a figure estimated at about £25 billion to nearer £14 billion. The gap is the difference between offering a 1p reduction in the basic rate of income tax, worth just over £7 billion a year, or another 1p drop in National Insurance, which costs about £5 billion a year.
“The chancellor will have room to manoeuvre but major tax cuts are looking less likely,” said Martin Beck, economic adviser to the EY Item Club, a forecaster. “The starting point for the OBR’s new economy forecast is weaker, and lower than expected inflation will weigh on revenue from the freeze in tax thresholds.”
The turnaround in fortunes is the reverse of Hunt’s last budget, when the watchdog became more optimistic about the economy just before November’s autumn statement. The projections then gave the chancellor the room to announce a surprise 2p reduction in National Insurance while having £13 billion in headroom against his budgetary target. He also benefited from having an extra year to meet his fiscal target, a luxury that is not available to the government for the spring budget.
