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U.K. Borrowing 25% Below Forecast in Budget Boost for Sunak

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U.K. government borrowing was well below official forecasts in the first five months of the fiscal year, providing a fillip for Chancellor of the Exchequer Rishi Sunak as he prepares for a review of tax and spending next month. The budget deficit totaled 93.8 billion pounds ($128 billion) between April and August, the Office for National Statistics said Tuesday. That’s 25% under the 125.7 billion pounds predicted by the Office for Budget Responsibility in March. The deficit in August alone stood at 20.5 billion pounds, higher than economists had forecast. The undershoot for the current year reflects a stronger-than-expected recovery from the coronavirus recession. That may allow the fiscal watchdog to cut borrowing projections for the current fiscal year that ends in March and would give Sunak some fiscal leeway when he presents his budget along with a three-year review of departmental spending on Oct. 27.

However, economists say any tax and spending giveaways are likely to be limited, given the scale of the task facing Sunak to repair the fiscal damage wrought by the coronavirus pandemic. The chancellor emphasized the need to repair the gap in his budget as the strain from the pandemic eases.

“We are determined to get our public finances back on track,” Sunak said in a statement on Tuesday. “That’s why we have set out the focused and responsible steps we are taking to keep debt under control.”

The latest figures included an upward revision to borrowing in the last fiscal year after the ONS incorporated the cost of writing off expected losses on the 80 billion pounds of loans made to companies hit by the pandemic. This, plus other smaller changes relating to pensions, raised the deficit in the 2020-21 to 325 billion pounds from a previously estimated 298 billion pounds.

The deficit in 2020-21 soared to a post-war high of 15.5% of gross domestic product, and was forecast by the OBR in March to be above 10% in the current year. The chancellor has signaled he wants to stop borrowing to fund day-to-day spending by the middle of the decade. He’s expected to announce new fiscal rules to enforce that commitment.

In a sign of his determination to get the public finances under control, Sunak this month raised payroll taxes to cover a 12 billion-pound boost for health and social care, rather than borrowing to pay for it.

Hanging over the announcement is the threat from higher inflation, which is pushing up the cost of government debt tied to the retail price index. The Treasury would face additional debt costs if the Bank of England starts raising interest rates next year, as economist increasingly expect.

Debt interest costs in August almost doubled from a year ago to 6.3 billion pounds, but government spending overall was little changed. Tax revenue rose by almost 10%, boosted by VAT, stamp duty on house purchases and income taxes.

“Interest payments put upward pressure on spending as the cost of servicing debt reached the highest level of any August since records began,” said Michal Stelmach, senior economist at KPMG UK. “This was due to higher RPI inflation, to which around a quarter of government debt is pegged, reversing the downward trend in debt interest to revenue ratio since 2012.”

Education and transport as well as additional spending on the National Health Service are also likely to exert further pressures on the public purse beyond this year as Prime Minister Boris Johnson seeks to deliver on his pledge to “level up” poorer areas of the U.K.

Crucially, the government’s room for maneuver also depends on the OBR’s assessment of the long-term loss of output caused by the pandemic. The Institute for Government calculates Sunak would get a 25 billion-pound windfall if the economy follows the path projected by the BOE, which puts the hit at about 1.25% rather than the 3% estimated by the OBR in March.

(Updates with figures on tax and debt interest.)

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