UK public finances give Chancellor room for Budget giveaway
George Osborne may be able to afford a tax giveaway of more than £7bn in next month’s Budget and still meet his deficit reduction targets, after January’s public finances came in even better than expected.
Official figures from the Office for National Statistics showed that the Government paid off £7.8bn of the country’s debts last month, better than both the £6.3bn expected and £5.2bn in January last year.
The surplus pulled the national debts back below £1 trillion, at £989bn, though they are expected to rise back past the benchmark in the next couple of months.
The strength of tax receipts, which hit a record monthly high of £61bn, has put the Chancellor on course to undershoot significantly his official deficit target this year, potentially providing him a multi-billion pound to either cut taxes or raise spending try to stimulate growth.
The Office for Budget Responsibility has forecast that the Government will have had to borrow £127bn for the year to April – a key metric on which the Chancellor has based his current austerity plan.
Following today’s announcement, the total for the year to date is £93.5bn, down from £109bn last year, with just two months remaining.
Chris Williamson, chief economist at Markit, said: “With two months to go [the £127bn] target looks easily attainable … [it] would still be met even if the deficit in February and March matched the recent record of £29bn seen for these two months in 2010.”
Mr Williamson added: “The combination of higher than expected tax receipts and planned spending cuts could mean the deficit for the year comes in below £120bn. That undershoot may provide George Osborne with some leeway to seek ways to stimulate economic growth in the Budget.”
Darren Winder, chief economist at Oriel, said the Chancellor is most likely to use any windfall to pay for a further increase in the personal allowance to take more people out of tax. From April, the personal allowance is rising to £8,105 already. A £7bn windfall would be more than enough to raise that to £9,000, moving closer to the £10,000 manifesto promise.
Mr Winder estimated that a £1,000 rise in the personal allowance would cost about £4bn.
Mr Williamson said the expected deficit undershoot should not be a one-off, but a sustainable shift down in the Government’s borrowing levels.
“Although rising unemployment looks set to push up government spending in coming months, this is likely to be offset by other deficit-fighting cuts. In the meantime, tax receipts should rise on the back of stronger economic growth,” he said.
The windfall could be even greater than £10bn. Howard Archer, UK economist at IHS Global Insight, said: “If the overall performance of the first 10 months was replicated through the rest of the fiscal year, the [deficit] would come in at £116.4bn, which is appreciably below the forecast of £127bn.”