The UK posted a smaller than budget surplus in January, a month that traditionally sees an inflow of tax revenues, according to official figures that highlighted the challenge facing incoming chancellor Rishi Sunak.
The surplus, excluding public sector-owned banks, stood at £9.8bn, down by £2.1bn or 18 per cent from January 2019, the Office for National Statistics said. The consensus forecast was for an £11.4bn surplus.
This meant that borrowing in the current financial year-to-date covering April 2019 to January 2020 was £44.8bn, £5.8bn or 14.9 per cent more than in the same period the previous year.
If the trend continues over February and March, the full-year deficit will be around £45bn, according to analysts at Investec Bank. This would still be below the £47.6bn that the Office for Budget Responsibility has forecast.
An improvement in revenue thanks to a record £16.2bn collected through self-assessment was cancelled out by a 3.6 per cent annual increase in current spending – day-to-day rather than investment expenditure reflecting increases in spending on health, social care and education pledged by former prime minister Theresa May.
Spending by government departments rose by 6.5 per cent compared with a year earlier. Total spending, including capital investment, rose by 5.5 per cent. The current budget in the fiscal year so far was in deficit by £7.2bn.
Under the fiscal rules set by former chancellor Sajid Javid, who resigned earlier this month, the government must balance the current budget over three years, although borrowing for infrastructure is allowed up 3 per cent of GDP, which would allow an extra £22bn of public sector net investment a year.
“While the current fiscal rule, would still allow a large rise in public investment, the rise in the deficit makes the ambition of balancing the current budget deficit more restrictive,” said Andrew Wishart, a UK economist at analysts Capital Economics.
Mr Sunak said this week he would stick with the 11 March date for the government’s first post-Brexit budget, ending speculation that the plans, which are likely to entail a big increase in spending, would be delayed.
Philip Shaw, the chief UK economist at Investec, said the critical factor for next month’s budget would be how much fiscal headroom there was to raise spending further beyond the plan for 2020-21 that Mr Javid set out last September.
“The Conservatives’ manifesto committed the party to balancing the current budget during this parliament,” Mr Shaw said.
He added that how much room Mr Sunak had depended on precisely how this was defined, for example, which specific year in the parliament was used.
“Our guess is that although there will not be much space for fiscal generosity, the chancellor will find some,” Mr Shaw said.