- December borrowing below expectations
- Potential for tax cuts
- Reduced interest rate expectations
Analysts assert that last month’s government borrowing, below expectations, has increased the likelihood of tax cuts in the budget.
According to the Office for National Statistics (ONS), borrowing decreased to £7.8 billion in December, the difference between tax revenue and expenditures.
An abrupt decline in interest payments resulted from the steep decline in inflation.
According to analysts, the latest figures may provide the chancellor with more “flexibility” regarding tax cutbacks.
Jeremy Hunt indicated at the World Economic Forum in Davos last week that he intended to reduce taxes.
Presumably, he will attempt to accomplish this in the March Budget before the general election anticipated later that year.
The amount borrowed in December was £8.4 billion less than the same month last year and the lowest amount borrowed in December since 2019.
Since December 2022, interest payments on government debt have decreased by £14.1 billion to £4 billion.
Budget Flexibility Amid Positive Figures
The previous year’s decline aided it in inflation. The Retail Price Index, an indicator of inflation, determines the rate at which the government pays interest.
Ruth Gregory, deputy chief UK economist at Capital Economics, stated that the chancellor would have “a little more leeway for a big pre-election splash in the spring Budget on 6 March” due to the better-than-anticipated figures for December.
According to ONS data, the borrowing for the nine months leading up to December 2023 was £119.1 billion. Although this amounted to £11.1 billion more than the corresponding period in the previous year, it fell short of the amount predicted by the Office for Budget Responsibility (OBR), the government’s economic monitor.
Ms Gregory stated that borrowing would fall short by £5 billion of the OBR’s full-year estimate of £123.9 billion.
Anticipations that interest rates will be reduced quicker now than when the OBR issued its most recent forecast in November have also increased due to lower inflation.
According to Ms Gregory, the modification in interest rate projections indicates that “we suspect the OBR will substantially reduce its borrowing forecast for 2025-26.”
She further stated that this might provide the chancellor with additional flexibility to reduce taxes while adhering to the self-imposed expenditure restrictions of the government.
Ms Gregory stated that this would likely enable him to declare a freeze in fuel duty in April 2024 (approximately £6 billion per year), as well as additional crowd-pleasing measures, such as a 1 penny reduction in income tax (about £6.9 billion per year), while maintaining fiscally prudent appearances.
Martin Beck, the EY Item Club’s principal economic adviser, stated that the reduced interest rate expectations should reduce annual debt interest expenditures by approximately £10 billion.
He stated that prominent tax cuts in the spring budget are probable.
The aggregate debt of the government, accumulated over an extended period, stood at £2.67 trillion as of the conclusion of December.
The ONS reports that this represents 97.7% of the gross domestic product (GDP) of the United Kingdom’s economy, with levels that have not been seen since the early 1960s.
In recent years, government borrowing has increased significantly. In addition to implementing economic support measures worth billions of dollars during the COVID-19 pandemic, the government subsidised energy costs that skyrocketed in the wake of Russia’s invasion of Ukraine.
“Protection of millions of lives and livelihoods amidst Putin’s energy shock and a once-in-a-century pandemic has engendered economic challenges,” said Laura Trott, chief secretary to the Treasury.
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Nonetheless, it is proper that we repay these debts to prevent future generations from having to foot the bill.
Darren Jones, the shadow chief secretary to the Treasury for the Labour Party, stated, “Since 2010, the national debt has more than doubled and is at its highest level since the 1960s.”
The Conservative Party cannot afford another five years of low growth and high taxes, worsening the situation of the working class.
“The brutal truth remains that the British public is now beset by debt and endless tax hikes as a result of Conservative ministers crashing the economy,” said Sarah Olney, a spokesman for the Liberal Democrats in the Treasury.
