The Chancellor appeared to get two pieces of good news this morning as rumours swirled about potential tax cuts to be dangled in front of the country to boost Conservatives ‘electoral prospects in the Spring Budget.
First, the government banked a surplus of £16.7bn in January, the highest on record.
Second, borrowing across the financial year so far has come in £9.2bn below the Office for Budget Responsibility’s (OBR) November forecasts.
So will this give Jeremy Hunt the room to unveil meaty tax cuts come 6 March?
The short answer is no. January’s figures are always boosted by receipts from self-assessed tax receipts, so this is not an indication of a substantially healthier fiscal position.
Indeed, the record monthly surplus was actually lower than markets had expected as after-tax receipts came in below expectations. The OBR forecast an £18bn surplus while markets expected it to be £18.7bn.
The £9.2bn undershoot on borrowing in the year-to-date is good news, but it won’t have a big impact on how much headroom the Chancellor will have to play with in his Spring Budget.
As a reminder, the term headroom refers to the space the government has to meet the self-imposed target of having debt falling as a proportion of GDP in the fifth and final year of the OBR’s forecast.
In effect, it measures how much scope there is for Hunt to cut taxes while retaining a veneer of fiscal responsibility.
But Hunt’s headroom will be determined more by the medium-term economic outlook than it is by a few months’ worth of borrowing figures.
Martin Mikloš, a research economist at the Institute for Fiscal Studies, said the OBR’s judgement on growth and inflation will be “much more important” than lower borrowing figures over the past few months.
So how’s the outlook looking?
Inflation will be lower across the OBR’s March forecast than its November round. This will hit tax receipts, as the impact of fiscal drag wanes, but it will also cut government spending on debt interest.
How the two interact will depend on the UK’s wider economic performance: Stronger growth lifts tax receipts and vice versa. Here the recession confirmed last week will bite the Conservatives.
“The starting point for the OBR’s new economy forecast is weaker, given the level of cash GDP in Q4 2023 was almost one per cent smaller than projected in November,” Martin Beck, chief economic adviser to the EY Item Club said.
“The Chancellor will have room to manoeuvre, but major tax cuts are looking less likely,” Beck said.
Hunt had £13bn of headroom in the Autumn Statement following his £20bn package of tax cuts.
Ruth Gregory, deputy chief UK economist at Capital Economics, thought this would only increase to £15bn in March due to the OBR’s likely downgrades to GDP and inflation.
£15bn is hardly enough to turn the election in favour of the Conservatives, but there is another option for Hunt.
A number of commentators say that his existing headroom already relies on hugely unrealistic spending plans, which will see deep post-election spending cuts.
If his existing headroom is already based on fiction, why not push the lie a little further?
As Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said “the Chancellor can pencil in even more implausible figures for future levels of non-interest spending in order to hit his self-imposed target”.
Over to you Mr Hunt.