Surprise Drop in September Government Borrowing
September government borrowing was lower than the majority of economists had anticipated, but remains elevated, according to data.
Economic Data and Expectations
The difference between spending and tax revenue, or borrowing, amounted to £14.3 billion in the previous month.
This was £1.6 billion lower than the same month last year, but the sixth highest September total since 1993 when records began.
The statistics are released prior to the November release of the Autumn Statement, but the chancellor has thus far downplayed the likelihood of tax cuts.
Last month, experts anticipated £18.3 billion in government borrowing, while the Office for Budget Responsibility predicted £20.5 billion.
Calls for Tax Cuts and Political Pressures
The optimistic data released by the Office for National Statistics (ONS) has prompted certain think tanks, including the right-leaning Institute of Economic Affairs, to propose that the Autumn Statement could now accommodate “well-targeted tax cuts.”
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Some Conservative Members of Parliament are also pressuring Chancellor Jeremy Hunt to reveal his intentions regarding tax reductions prior to the upcoming general election. These demands have intensified since the Conservative Party’s double by-election defeat on Friday.
Constituent for North Warwickshire, Craig Tracey, stated that reducing national insurance or income tax would be the most effective method to make voters feel better at this time. “The thing [voters] need to see is an immediate impact on their bottom line,” according to him.
Additionally, former Conservative minister John Redwood advocated for a return to pre-2017 tax rates for self-employed individuals and an increase in the VAT threshold for small businesses.
Inflation’s Influence on Government Finances
High inflation, according to the Resolution Foundation, which campaigns to improve living standards for those with low to moderate incomes, increased the nominal value of government tax revenue, providing the chancellor with a “short-term” lift prior to his budget update.
However, senior economist at the think tank, Cara Pacitti, stated that the longer-term suffering caused by higher interest rates would “likely outweigh the short-term gain.”
“Together, this is likely to reduce the chancellor’s already limited room for manoeuvre,” according to her.
Chancellor’s Stance and Fiscal Challenges
To date, Mr. Hunt has expressed strong opposition to the prospect of near-term tax cuts, stating that such measures are “virtually impossible” and that the government should concentrate on reducing inflation.
In response to the most recent borrowing figures, Mr. Hunt stated that the government’s debt interest expenditures were “clearly unsustainable” and had doubled since the previous year.
However, he claimed that the government “was compelled to borrow money to protect lives and livelihoods during the pandemic” and that Russia’s invasion of Ukraine “pushed up inflation and interest rates.”
In light of everything we hear about the chancellor having little “wiggle room” to accommodate spending increases or tax cuts in relation to his politically determined fiscal targets, today’s figures serve as stark reminders of how rapidly that wiggle room can expand or contract in response to changes in the economy or politics.
Consider the interest payable on central government debt, which was the third lowest since monthly records began in 1997 and was not at all alarmingly high in September. The government pays interest on approximately a quarter of its outstanding debt in accordance with the antiquated Retail Price Index, an indicator of inflation that has experienced a significant decline in value in the last quarter.
Then, consider the government’s tax revenue, which has been increasing primarily due to increased domestic income tax and national insurance payments. Notwithstanding the political commitments of both main political parties to refrain from increasing tax rates, the chancellor is amassing an enormous amount of revenue from us due to the imposition of frozen tax thresholds.
As a result, although expenditures have increased, the government’s interest expense has decreased, and its revenue has increased significantly due to the inflationary trend. This may serve as a reminder of the fundamental differences between the government’s and our own finances.
Mr. Hunt estimated last week that higher interest rates would set the United Kingdom back an additional £20bn to £30bn annually.
September government debt, according to the ONS, was nearly £2.6 trillion, an increase of over 2% from the same month last year.
The government must pay more interest as the national debt grows.
In recent years, both high interest rates and inflation have typically correlated with the debt. Which has resulted in the government paying a greater total amount in interest on its debt.
PwC economist Divya Sridhar stated that public expenditure in the United Kingdom was “especially vulnerable” to inflation “due to the fact that a substantial portion of UK government debt is index-linked, which means interest payments increase in tandem with inflation.
However, since inflation has declined from its zenith in the previous year, certain debt repayments have reduced. The ONS reported that government debt interest was £0.7 billion in September, a significant decrease of £7.2 billion compared to the same month in 2022.
“Our optimism persists that the government will achieve its objective of halving inflation by the conclusion of this year.”
“Ms. Sridhar stated that achieving this objective would realize substantial benefits for public finances.”
The Institute of Chartered Accountants in England and Wales’ director of public sector and taxation, Alison Ring, stated that the elimination of HS2’s northern leg would “likely lead to a modest decrease in expenditures during the latter part of the fiscal year.” The government is still looking for alternative ways to reduce costs, as debt interest and inflationary pressures continue to exceed initial projections.
Mr. Hunt on Friday stated that the United Kingdom must “get debt falling and reduce public sector waste so that those delivering public services can get back to what they do best; teaching our children, keeping us safe, and treating us when we’re sick.
The Conservatives have cut real-term funding for education and local government and created financial gaps in the National Health Service since 2010.
The UK economy, according to the independent Institute for Fiscal Studies, is in a “horrible fiscal bind” this week, with no room to reduce taxes or increase public expenditure.
