Chancellor Jeremy Hunt woke up on Tuesday to much better UK public finances data than expected. Public borrowing remains high, but is £30bn lower than anticipated 10 months into the 2022-23 financial year.
Improvements in the public finances are a double-edged sword for Hunt. He now has a £30bn windfall, according to data from the Office for National Statistics, providing him with more options on taxation and spending ahead of his March 15 Budget, but also creating more demands on public money.
The Treasury can no longer say there is no spare cash available, although it has legitimate concerns that the good news on the public finances does not allow the UK to go from famine to feast in one fell swoop.
How big was the surprise about the public finances?
It was huge. The Office for Budget Responsibility forecast in November that the government would borrow £177bn this financial year, roughly 7 per cent of national income.
On a like-for-like basis, the fiscal watchdog and the ONS now think that with only two months to go before the end of the current financial year, the level of borrowing so far is running at a level £30.6bn lower than previously expected. That would represent a 20 per cent improvement in borrowing, and more than 1 per cent of gross domestic product.
The £30bn improvement so far in 2022-23 splits roughly into a third coming from higher-than-expected tax revenues, a little under a third from reduced borrowing by local authorities and nationalised industries, and the rest from lower-than-anticipated government subsidies for household and company energy bills, net investment and debt interest payments.
The Resolution Foundation, a think-tank, said the improvements represented “a fresh tonic to the chancellor as he prepares to deliver his spring Budget in three weeks’ time”.
Why were the borrowing figures so much rosier?
The Treasury, OBR and independent economists were all caught out on Tuesday by the strength of the public finances. After some scratching of heads and pointing to the footnotes of recently changed OBR spreadsheets, three reasons accounted for the surprise numbers.
The first was mundane. As is often the case, the ONS made revisions to the data for the first nine months of the financial year. These were large, however, and reduced borrowing recorded between April and December by £5.8bn.
The second reason people were surprised was that the OBR made an error in its assessment of the monthly profile of the public finances in the Autumn Statement, and only changed its spreadsheet on Monday. Previously the fiscal watchdog had said borrowing of £9.2bn was likely in January, a figure it revised on Monday to a surplus of £0.4bn.
The mistake arose because the OBR wrongly assumed Treasury payments to cover Bank of England losses on its quantitative easing programme would increase public sector borrowing in January. The payments in fact have no effect on borrowing.
The OBR error influenced economists’ expectations of the likely budget deficit in January because the fiscal watchdog’s monthly borrowing estimates are normally a reasonable guide. Economists polled by Reuters before Monday forecast a January deficit of £7.8bn on average. The ONS recorded a surplus of £5.4bn for last month.
The third reason reflects an arcane difference between the OBR and the ONS on when the statistics agency will make an adjustment to the implied public spending that is tied to student loans. This adjustment has already been factored into the £30bn windfall, but not in the headline public finances data.
Will the improvement in the budget deficit persist?
This is the £30bn question. For 2022-23, the answer is almost certainly yes, and the OBR on Tuesday prepared financial markets for a large change in its borrowing assessment for the current financial year, saying the “January surplus and revisions pull [the] deficit further below [our] profile”.
The more important question for the health of the public finances is how much of the improvement this year will persist into the medium term.
Carl Emmerson, deputy director of the Institute for Fiscal Studies, another think-tank, said that self assessment income tax revenues and debt interest figures “look strong and will flow through” into improvements in borrowing in future years.
But he added this did not mean there was a huge windfall for Hunt to spend. “You’ve got to remember that in November’s Autumn Statement, the chancellor set the loosest fiscal target ever and then only met it by a hair’s breadth,” said Emmerson, referring to Hunt’s goal for public debt to be falling as share of GDP in five years’ time.
Why is the Treasury so cautious?
Hunt stressed the importance of sticking to his plan “to reduce debt over the medium-term” and took a very cautious view of the ONS figures.
He is aware the OBR is likely to estimate a sizeable public finances windfall in 2022-23 because he already has sight of the watchdog’s draft fiscal forecasts for the Budget.
But the chancellor is eyeing more spending on March 15 that will eat up some of the windfall.
For example, he is poised to freeze fuel duty at current levels, costing almost £6bn a year, and has promised some further support for businesses with energy bills after April, worth a few billions more.
Finally, Hunt will be keen to build greater headroom into the public finances, notably to provide scope for pre-election giveaways.
The Treasury also stresses that some of the benefits now being seen in the public finances, such as lower government energy subsidies due to falling wholesale gas prices, will not last.
Most importantly, officials know that high inflation can boost tax revenues but hurt cash-based government spending plans, and this leaves public services exposed and in need of further financial support.
Cara Pacitti, senior economist at the Resolution Foundation, said that despite the good news and scope for giveaways in the Budget, Hunt “can’t afford to be relaxed about the state of the public finances”.