BRITAIN recorded a smaller than-expected budget deficit in July, official data showed on Tuesday (22), giving chancellor Jeremy Hunt a bit of hope that he can cut taxes later this year, before an election expected in 2024.
Some economists warned, however, that an economic slowdown or a recession in the coming months, as the Bank of England keeps on raising interest rates to fight high inflation, could deny Hunt the room for manoeuvre for pre-election giveaways.
Net borrowing, excluding stateowned banks, stood at £4.3 billion last month. In the first four months of the financial year, borrowing stood at £56.6bn.
That was almost £14bn more than the same period last year, but 11.3 billion less than forecast by the Office for Budget Responsibility (OBR) whose projections underpin the government’s fiscal plans.
Hunt and prime minister Rishi Sunak have so far resisted pressure from MPs within their Conservative Party to cut taxes and boost their chances in the election which opinion polls suggest they will lose.
“As inflation slows, it’s vital that we don’t alter our course and continue to act responsibly with the public finances,” Hunt said in a statement after the data.
“Only by sticking to our plan will we halve inflation, grow the economy and reduce debt.”
Hunt has kept a tight grip on the public finances since he took over at the Treasury late last year after turmoil in financial markets caused by former prime minister Liz Truss’s unfunded tax cut plans.
The Office for National Statistics said public debt stood at £2.579 trillion or roughly 98.5 per cent of gross domestic product, up almost two percentage points from a year earlier and holding at high levels last seen in the 1960s.
Interest costs rose by £1.5bn compared with July last year to £7.7bn, the highest for July since records began in April 1997. But a recent easing of Britain’s high inflation – which adds to payouts for holders of inflation-linked bonds – should ease that burden soon, the office said.
The public finances were boosted by inflows of self-assessed income tax receipts which are typically strong in July, which stood at £11.8bn, £2.5bn more than in July last year.
Borrowing by Britain’s government soared during the Covid-19 pandemic and was pushed up further by last year’s energy price surge, which prompted the government to spend around £40bn in subsidies in order to help households and businesses.
Ruth Gregory, deputy chief UK economist at consultancy Capital Economics, said Hunt should remain cautious about the outlook for the public finances with interest rates still rising and a mild recession apparently on its way. “As a result, we still think the chancellor will have little room to unveil largescale permanent tax cuts and/or spending rises in the Autumn Statement without jeopardising his fiscal rules,” Gregory said.
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said a likely increase in the OBR’s projections for debt spending, after the BoE’s run of interest rate increases, was likely to reduce any wiggle room for Hunt. (Reuters)