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Jeremy Hunt handed £11.4bn borrowing boost despite August setback

jeremy hunt
Jeremy Hunt is under pressure to make pre-election giveaways as public finances improve - REUTERS/Toby Melville

The Government has borrowed £11.4bn less than expected so far this financial year as higher taxes help to offset a surge in borrowing, official data shows.

Public sector borrowing in the first five months of the current financial year was £69.6bn, according to the Office for National Statistics (ONS), which was 14pc below the Office for Budget Responsibility (OBR)’s March forecast.

However, greater public spending meant borrowing surged year-on-year in August and was much higher than economists had anticipated.

In August, total public sector net borrowing excluding public sector banks was £11.6bn.

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This was £3.5bn more than the same month last year and the fourth-highest August deficit since monthly records began in 1993.

It also exceeded the consensus expectation of £11.1bn but was £1.4bn less than the OBR forecast back in March.

All of which will fuel the debate over whether Chancellor Jeremy Hunt should cut taxes.

While borrowing remains high, Thursday’s figures show this has been partially offset by increased revenues from the Treasury’s stealth tax. 

The Government’s total tax take in August was £76.6bn, £3.1bn more than the same month last year and £1.2bn more than the OBR had expected.

Within this, VAT receipts totalled £16.8bn, £3.1bn more than the OBR forecast.

Debt interest payments were also less than expected at £5.6bn, compared to the OBR’s prediction of £7.8bn.

Ashley Webb, economist at Capital Economics, said the data will give the Chancellor “a bit more wiggle room for pre-election giveaways”.

The Chancellor has ruled out tax cuts this autumn, but Mr Webb said he now has more leeway to announce tax cuts or spending rises in his Spring Budget in March 2024.

However, early data suggests the economy is weakening, which will hit tax receipts, Mr Webb warned.

“While the OBR’s forecasts are based on real GDP growth of 0.2pc and 2.1pc in 2023/24 and 2024/25 respectively, we expect growth of just 0.1pc and 0.8pc,” he said.

Total public sector net debt was 98.8pc of the UK’s gross domestic product, 2.3 percentage points higher than in August 2022. It is at levels last seen in the early 1960s.

Chancellor Jeremy Hunt said: “These numbers show why after helping families in the pandemic we now need to balance the books. That becomes much easier when inflation is under control because higher inflation pushes up interest rates, so we need to stick to the plan to get it down.”

Michal Stelmach, senior economist at KPMG UK said the Government faces “a trade-off between higher taxes or lower spending”.

Mr Stelmach added: “We expect public sector net borrowing to reach around £120bn in 2023-24. This would be the lowest level since 2019-20, although it would still amount to 4.6pc of GDP, compared to the Government’s medium-term target of 3pc according to the current fiscal rules.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that although GDP data has so far been better than expected, business survey data suggests that the economy is weakening.

The Government’s debt interest payments will also likely be higher than the OBR had anticipated due to higher interest rates, he added.

“Households usually enjoy tax cuts in the run-ins to general elections, but we expect Mr Hunt to make only token gestures in the Autumn Statement,” Mr Tombs said.

A rise in gilt yields and the retail prices index, which flow into government’s costs, mean debt interest payments across the financial year will likely be around £35bn higher than the OBR last forecast, Mr Tombs said.

The Government’s commitment to the triple lock means it will have to raise the state pension by 8.5pc in April, in line with wages, which will cost £2bn more than the OBR expected, he added.

“We think that 2024/25 still will be a year of net tax increases, despite the political pressures created by the general election,” Mr Tombs said.