Yahoo Finance UK public debt slows and raises hopes for tax cuts
The UK government borrowed much less than expected last month, fuelling hopes that chancellor Jeremy Hunt will have room for tax cuts in the spring budget.
Public sector borrowing rose by £7.8bn in December, about half the borrowing made in the same month in 2022, according to figures from the Office for National Statistics (ONS).
It is the lowest for the month borrowing since 2019 and significantly lower than the £14bn expected by the Office for Budget Responsibility (OBR).
Hunt has previously said that there is “clear” proof that countries with lower tax burdens enjoy higher economic growth, in the biggest hint yet that the Conservative party is looking to cut taxes ahead of the general election.
"My priority in the upcoming spring budget will be to build on our progress and go even further to drive economic growth," Hunt wrote in The Mail on Sunday newspaper.
"Because if we can sustainably grow the economy, we can relieve the pressure on families and generate the revenue necessary to invest in the public services we all rely on."
Read more: UK interest rates to fall to 4% this year, say experts
The chancellor will deliver his next budget on 6 March and hinted there may be cuts in a pre-election autumn statement, saying he plans to put the UK on a long-term “path to lower taxes”.
Ruth Gregory, deputy chief UK economist at Capital Economics, estimates that Hunt could have £20bn of headroom for tax cuts in March.
She said: "With market interest rate expectations and long-dated gilt yields having fallen since November, we suspect the OBR will revise down its borrowing forecast significantly from 2025/26. That may provide the chancellor with “headroom” against his fiscal mandate of about £20bn in the budget.
"That will probably allow him to unveil a freeze in fuel duty in April 2024 (costing about £6bn a year) but perhaps also to announce more crowd-pleasing measures, such as a 1p cut to income tax (costing £6.9bn a year), while still maintaining fiscally prudent appearances."
Public sector net borrowing excluding public sector banks was £7.8 billion in December 2023.
This was £8.4 billion less than in December 2022, and the lowest December figure since 2019.
➡️ https://t.co/KEl5HlNE51 pic.twitter.com/z00WhjRpRC— Office for National Statistics (ONS) (@ONS) January 23, 2024
Michal Stelmach, senior economist at KPMG UK, however, warned that some of Hunt’s wiggle room could “easily be squashed” if some of the downside risks materialise.
He said: "The government’s implicit commitment to freeze fuel duty rates lowers revenue by £6bn a year relative to current plans, while the assumption that real spending on unprotected departments would have to fall by over 2% a year is largely unrealistic in the absence of significant productivity improvements.
"That’s before considering the longer-term pressures from an ageing population, energy transition, and slowing workforce growth.”
Part of the drop was a result of the re-evaluation of the value of student loans a year ago, which added $10bn to the government’s books at the time.
Read more: Is now the time to move from a variable to a fixed mortgage?
Falling inflation also helped to push down borrowing, by lowering the interest bill on index-linked government debt. The government paid £4bn in debt interest last month, which was £14.1bn less than in December last year.
Chief secretary to the Treasury Laura Trott said the economy is beginning to turn a corner:
She commented: "Protecting millions of lives and livelihoods during [Vladimir] Putin’s energy shock and a once in a century pandemic has created economic challenges. However, it is right that we pay back these debts so future generations are not left to pick up the tab.
“Because of this government’s decisive action, the economy is now beginning to turn a corner: Inflation has more than halved. Debt is on track to fall as a share of the economy. And we have been able to afford tax cuts for 27 million working people, and an £11bn tax cut to drive business investment."
Overall government debt was around 97.7% of the UK’s annual gross domestic product (GDP), around 1.9 percentage points higher than a year earlier and at levels last seen in the early 1960s, the ONS said.
Watch: Jeremy Hunt hints at further tax cuts in upcoming budget
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