UK government borrowing falls to £7.8bn in December, boosting Jeremy Hunt’s tax cut hopes

Introduction: UK borrowing falls

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Britain’s monthly government borrowing fell last month, potentially giving chancellor Jeremy Hunt more room for tax cuts in the March budget.

Figures just released by the Office for National Statistics show that the UK’s public sector net borrowing (excluding public sector banks) fell to £7.8bn in December.

That’s the lowest deficit for any December since 2019, just before the Covid-19 pandemic, and half as much as the UK borrowed to balance the books in December 2022.

It’s also a lot lower than forecast; economists polled by Reuters had expected public sector net borrowing, excluding state-owned banks, to hit £14bn.

Falling inflation helped to push down borrowing, by lowering the interest bill on index-linked government debt.

Central government debt interest payable was £4bn in December, £14.1bn less than in December 2022, the ONS says, due to the fall in the Retail Price Index measure of inflation.

So far this financial year (since April), the UK has borrowed £119.1bn, which is £5bn lower borrowing than the £124.1bn forecast by the Office for Budget Responsibility.

That indicates there is wiggle-room for some fiscal loosening, while keeping within the government’s fiscal rules.

This is the fourth-highest borrowing bill at this stage of the financial year since monthly records began in 1993, behind the Covid-19 years of 2020, 2021, and 2009 following the global financial crisis.

A chart showing UK borrowing in the financial year to December 202 — Photograph: ONS

Last week in Davos, Hunt dangled the prospect of big tax cuts in his March budget, telling reporters that he wanted to move in the direction of a low-tax economy.

Speaking at the World Economic Forum, the chancellor said:

“In terms of the direction of travel we look around the world and we note that the economies growing faster than us in North America and Asia tend to have lower taxes, and I believe fundamentally that low-tax economies are more dynamic, more competitive and generate more money for public services like the NHS.

That’s the direction of travel we would like to go in but it is too early to say what we are going to do.”

Also coming up today

Workers from Tata’s steelworks in Port Talbot are heading to Parliament today, ahead of a House of Commons debate on the future of the plant.

The debate was called by the Labour Party, following the announcement last week that Tata is planning to close its blast furnaces at Port Talbot and is intending to cut 2,800 jobs. Labour will use an opposition day debate to force a vote on the issue….

Investors in the City will be digesting the latest policy decision from the Bank of Japan overnight – it left interest rates at -0.1%, and stuck to its yield curve control policy that keeps the upper limit for 10-year Japanese government bond yield at 1%.

BOJ board members also lowered their forecast for core consumer inflation.

The agenda

7am GMT: UK public finances for December
10.15am GMT: Treasury Committee inquiry into SME access to finance
3pm GMT: Eurozone consumer confidence index

Key events

Ryanair in deal with online travel firm Loveholidays

After a long period of fighting online travel agencies (OTAs), Ryanair has taken the plunge and will start listing its flights with online package-holiday provider Loveholidays.

Ryanair says the real will allow Loveholidays’ customers to buy Ryanair flights, seats, and bags as part of a package deal, at Ryanair’s prices, without being overcharged.

Ryanair’s Dara Brady said:

“We are pleased to announce this first OTA partnership with loveholidays, which will ensure that loveholidays’ customers can now book Ryanair flights, seats, and bags as part of their package with the guarantee that they will not be overcharged for flights, bags, or seats, they will receive flight updates directly from Ryanair and will also have direct access to their booking through their myRyanair account.”

Ryanair has previously launched legal action in the US against Booking.com, and last month it won an injunction prohibiting screenscraper Flightbox from scraping Ryanair’s website for flight details to pass onto OTAs.

Today, Ryanair warns that consumers should watch out for “OTA Pirate scams” such as overcharging, hidden mark-ups, and fake customer contact and payment info.

Ryanair will list its flights with online package-holiday provider Loveholidays, in a first for the Irish budget carrier, which has fought online listings in court https://t.co/tUIKHWWBth

— Bloomberg UK (@BloombergUK) January 23, 2024

The drop in UK government borrowing hasn’t brought much cheers to shares in London.

The UK’s FTSE 100 index is down 0.2%, or 15 points, at 7472 points this morning.

Mining stocks are leading the risers, after Chinese policymakers pledged to take more measures to stabilise the market, which has also lifted the iron ore price. Anglo American are up 3%, followed by Fresnillo (+2%) and Rio Tinto (+1.8%).

At the other end of the table, Rolls-Royce are down 2%, with catering firm Compass losing 1.8% a day after announcing the takeover of rival CH&CO.

Chapel Down toasts rising sales as English fizz grabs market share from champagne

Sarah Butler

English sparkling wine maker Chapel Down toasted a 14% rise in sales last year to £15m as the company said homegrown fizz makers had grabbed share from champagne.

The Kent-based vineyard, which listed on the Aim junior stock market last month, said it had increased sales of its core sparkling wine by 25% last year helped by a 12% increase in prices.

Sales of all Chapel Down products in pubs and restaurants rose 26% as the brand extended to new outlets, while exports were up 67% as the brand had a successful first year in UK duty free outlets including Heathrow and Gatwick.

The UK’s biggest sparkling wine maker benefited from a shift towards English fizz, with the category increasing retail sales by 16%, while champagne sales were down 9%, according to the market research firm Nielsen.

Budget tax cuts could put Labour’s £28bn green investment plan “at risk”

A fiscal windfall doesn’t have to be used to cut taxes.

Instead, the chancellor could devote any extra headroom in the March budget to lowering borrowing, or to increased investment.

Indeed, it would make more sense to work out how much investment the country needs, and then balance the burden between borrowing and tax (rather than prioritising cutting tax, and restricting investment to what you can safely borrow).

But politics doesn’t seem to work like that. And if Hunt does blow a likely £20bn fiscal headroom on lowering taxes in March, it could make it harder for the Labour party to push its plan to spend £28bn on green capital investment, should it win the next election.

The Financial Times reports:

Senior Labour figures have admitted they will look again at the £28bn-a-year spending promise if Hunt spends any fiscal flex that might be available to an incoming Labour government to cut income tax or national insurance.

Hunt’s allies also expect Labour leader Sir Keir Starmer to use the March 6 Budget as an “excuse” to drop the target, which has been repeatedly watered down in recent months.

“We have got our fiscal rules, they come first,” said a Labour official. “This is a Budget we are not writing.”

New – Labour will look again at its £28bn green plan if ⁦@Jeremy_Hunt⁩ burns through the fiscal headroom for Budget tax cuts. Team Hunt convinced Starmer will use the Budget as an “excuse” to ditch the plan https://t.co/a6FcqAvkVU

— George Parker (@GeorgeWParker) January 23, 2024

But as we reported on Sunday, the public will be put at risk if Keir Starmer drops his plan to spend £28bn a year on green investment, according to the head of the Fire Brigades Union, who warned that his members were already witnessing the effects of the climate crisis.

Crest Nicholson has become the latest UK housebuild to warn of persistent challenges in the housing market, as it reported a larger drop in profits than expected.

Crest Nicholson blamed a 28% drop in revenues in the year to 31 October 2023 on “the weakness in the housing market”, as home completions fell to 2,020, down from 2,734 in 2022.

Pre-tax profits tumbled 70%, on an adjusted basis, in 2023 to £41.4m from £137.8m the year before. That’s below analyst forecasts.

CEO Peter Truscott, whose retirement was announced today, says the results in 2023 were disappointing, but adds that recent falls in inflation and mortgage rates will help the housing sector.

Over at Crest Nicholson Preliminary Results for the year ending 31 Oct 2023: show they are reeling from high interest rates, a fire resulting in a legal claim, inc’d build costs at Farnham site & building safety payouts.
Result = Revenue down 28% at £657.5m (FY22: £913.6m) pic.twitter.com/8pdkMJO393

— Emma Fildes (@emmafildes) January 23, 2024

Victoria Scholar, Head of Investment, interactive investor, explains:

The housebuilders have had a tough time amid the backdrop of decreased mortgage affordability, build cost inflation and financial pressures on households.

But with the Bank of England expected to begin the shift towards monetary loosening in either the second or third quarter, investors have been looking back towards the housebuilder sector as a potential source of opportunity.

The dynamics which have punished the sector in recent years look set to shift this year, helping to lift housebuilder shares off the November lows. However, it could still be a bumpy ride ahead.”

Full story: Jeremy Hunt has room for £20bn tax cuts

Larry Elliott

A halving of UK government borrowing in Deember, year-on-year, has created scope for Jeremy Hunt to make tax cuts worth about £20bn in his March budget, our economics editor Larry Elliott writes.

Data from the Office for National Statistics showed that higher VAT and income tax receipts coupled with lower spending resulted in a deficit of £7.8bn in December 2023 – the lowest for the month since the pre-pandemic year of 2019.

With lower debt interest payments also contributing to the improvement in the government’s financial position, analysts said the prospects for a giveaway package had brightened.

The December deficit was more than £6bn lower than the £14bn pencilled in by the Office for Budget Responsibility – the independent watchdog responsible for the government’s fiscal and economic forecasts.

China “weighs stock market rescue package backed by $278bn”

In the financial markets, shares have rallied in China today on reports that Beijing is considering taking steps to stabilize the slumping Chinese stock market.

Bloomberg reported that policymakers are seeking to mobilize about 2 trillion yuan ($278 billion), mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link

They have also earmarked at least 300 billion yuan of local funds to invest in onshore shares through China Securities Finance Corp. or Central Huijin Investment Ltd., people familiar with the situation said.

More here: China Weighs Stock Market Rescue Package Backed by $278 Billion

The Shenzhen SE composite index, which has fallen almost 29% in the last year, has rallied by 1.4% today.

Hong Kong’s Hang Seng index, which has had a torrid time in recent years, has jumped by 2.6%.

The owner of discount chain Primark has warned that the disruption to shipping through the Suez Canal could push up its costs.

Associated British Foods told shareholders this morning that it does not expect any significant disruption to our supply chain due to events in the Red Sea, adding:

We also feel more confident in the delivery of the Primark adjusted operating margin in this financial year, driven by a further improvement in product gross margin.

This should insulate us well against potential additional costs of supply due to the disruption in the Red Sea should they arise.

ABF also reported that sales slowed at Primark last Christmas. Like-for-like sales grew by 2.1% in the 16 weeks to 6 January 2024, driven by higher average selling prices, slower than the 8% growth recorded in the previous quarter.

Total Primark sales grew 7.9%, after a slow start blamed on unseasonally warm weather.

Richard Hunter, head of markets at interactive investor, says:

“Primark remains the engine of growth for the business, with its value offerings still hitting the spot with an increasingly cost-conscious consumer.

Despite a slow start to the quarter given some unseasonably warm weather, Primark was back with a bang for Christmas. Womenswear and menswear were particularly strong, with the Christmas ranges proving popular.

New data from HM Revenue and Customs this morning shows how the tax burden has risen this year.

Total HMRC receipts for April 2023 to December 2023 have risen to £580.8bn, which is £26bn higher than a year ago.

Income Tax, Capital Gains Tax and National Insurance Contributions (NICs) rose by £12.8bn, while VAT brought in £8bn more and business taxes raked in an extra £9.2bn.

Inheritance Tax receipts for April 2023 to December 2023 were £5.7bn, £0.4bn higher than the same period last year.

Nicholas Hyett, Investment Manager at Wealth Club says:

“The government’s income from death duties is going up. That makes changes to IHT policy a careful balancing act.

Cutting rates might win votes, since many see IHT as an unjust grab for money that’s already been taxed once. But the revenue earned is playing an important part in the government’s spending programme, and a shortfall would need to be made up somewhere else.

Contrary to popular belief, inheritance tax doesn’t just affect the super-rich. Frozen tax brackets mean many who would not consider themselves wealthy will find themselves falling into the IHT bracket in future. Their standard of living hasn’t changed, indeed inflation means it might have gone backwards, but the government now considers them to be wealthy enough to face inheritance tax.

Photograph: HMRC

But receipts from stamp taxes fell by £4bn, while tobacco reeipts were £1.3bn lower.

Sarah Butler

Elsewhere in the economy, Lidl is increasing minimum pay for its shop staff from £11.40 to £12.00 an hour from 1 March, in the cut-price grocer’s third pay rise in a year.

The increase brings Lidl in line with rival Aldi which will increase minimum pay to £12 an hour next month.

Both will be in line with the independently verified living wage as competition for workers continues to be high in a tight labour market.

The drop in government support for energy bills also pushed down borrowing in December, says Michal Stelmach, senior economist at KPMG UK.

Stelmach explains:

“Public sector net borrowing came in at £7.8 billion in December 2023, down significantly from £16.2 billion a year earlier. This was mainly due to a large drop in debt interest payments which reflected a fall in monthly RPI inflation in October, while the energy price schemes, which contributed to spending last winter, are no longer in place.

Indeed, government spending on subsidies and other current grants, which included the cost of the Energy Price Guarantee and other support schemes, was down by £5.9 billion on a year ago.

Stelmach cautions, though that the UK’s fiscal outlook is “riddled with uncertainty”. That means that some of Jeremy Hunt’s wiggle room could “easily be squashed” if some of the downside risks materialise.

Stelmach explains:

The government’s implicit commitment to freeze fuel duty rates lowers revenue by £6 billion 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.”

Capital Economics: more wiggle room for a big pre-election splash

Jeremy Hunt has “more wiggle room for a big pre-election splash”, following this morning’s drop in government borrowing, say City consultancy Capital Economics.

Ruth Gregory, their Deputy Chief UK Economist, estimates that Hunt could have £20bn of headroom for tax cuts in March.

She says:

After nine months of the 2023/24 fiscal year, borrowing is on track to undershoot the OBR’s full-year borrowing forecast of £123.9bn by £5.0bn.

What’s more, 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 £6.0bn 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.

Divya Sridhar, economist at PwC, is hopeful that the bill for the UK’s inflation-linked bonds will continue to fall – easing the pressure on the public finances:

“The relatively lower debt interest payments in December 2023 were a key driver of the lower monthly borrowing figure compared to recent months.

Last month recorded the lowest December interest payment figure since 2020, and was less than a fourth of the interest payments paid in December 2022.

Despite the small uptick in CPI inflation last month from 3.9% to 4.0%, we expect inflation pressures to continue easing over the coming months, further lowering government spending on interest payments.”

Trott: economy is beginning to turn a corner

Chief Secretary to the Treasury, Laura Trott, has commented on this morning’s UK borrowing figures, saying:

“Protecting millions of lives and livelihoods during 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 £11 billion tax cut to drive business investment. “

The broader picture is that the UK national dent was clocked at £2.685 trillion at the end of December 2023, which is around 97.7% of UK GDP.

That’s 1.9 percentage points higher than in December 2022 and the highest level since the early 1960s.