January’s public finances figures have delivered some good news for Chancellor Jeremy Hunt ahead of the Budget in two weeks time, with economists predicting £15-20 billion of extra headroom for vote-winning giveaways.
UK public sector borrowing showed a record surplus of £16.7 billion for January, data from the Office for National Statistics revealed this morning.
This surplus was more than double the surplus of January 2023 and the largest surplus since monthly records began in 1993 in nominal terms.
Borrowing in the financial year to January 2024 was £96.6 billion, £3.1 billion less than in the same ten-month period a year ago.
This was £9.2 billion less than the £105.8 billion forecast by the Office for Budget Responsibility (OBR) in November 2023, thanks in part to a fall in Interest payable on central government debt.
"We doubt this will pave the way for a big pre-election splash," said economist Ruth Gregory at Capital Economics.
"We think the Chancellor will be handed 'headroom' of just £15 billion (0.5% of GDP), limiting his ability to unveil big unfunded tax cuts if he wishes to adhere to the fiscal rules."
Sam Tombs at Pantheon Macroeconomics predicted the OBR could make revisions to its economic forecasts which will squeeze the Chancellor’s fiscal headroom, but this might not stop the government from pulling some pre-election vote winners at the Budget.
"The Chancellor can pencil-in even more implausible figures for future levels of non-interest spending in order to hit his self-imposed target, for the debt-to-GDP ratio to be projected to be falling in five years time," Tombs said.
"So the real limit on Mr Hunt’s scope to deliver the tax cuts his party’s MPs are clamouring for is the gilt market’s willingness to absorb higher issuance, and any desire he has to avoid the MPC delaying interest rate cuts."
Balancing these conflicting influences, Tombs said he thinks Hunt will announce in the Budget another package of consumer-focussed tax cuts, amounting to a £20 billion giveaway in 2024/25.
"The OBR’s multipliers imply those tax cuts would boost GDP by about 0.25% in 2024/25, adding some extra fuel to a strengthening economic recovery, and bolstering the case for the MPC to reduce Bank Rate only gradually this year," he added.