Jeremy Hunt has received an unexpected £30bn windfall in the public finances ahead of his March Budget, giving the chancellor scope to provide extra support for energy bills, keep fuel taxes down and potentially solve public sector strikes.
In figures that surprised economists and the Treasury, the Office for National Statistics said the public sector registered a £5.4bn surplus in January, far better than the £7.8bn deficit expected by economists polled by Reuters.
In the financial year to January, the public sector borrowed £116.9bn, a figure £30.6bn less than forecast in November by the Office for Budget Responsibility, the UK official watchdog.
With much of that windfall coming from higher than expected tax receipts, it is likely to feed through into better public finance forecasts in future years.
Ruth Gregory, deputy chief UK economist at Capital Economics, said the figures suggest that Hunt “will have some wriggle room in the Budget to fund near-term tax cuts and/or spending rises”.
Samuel Tombs, economist at Pantheon Macroeconomics, agreed that Hunt was “in a comfortable position” ahead of the Budget on March 15.
Although public borrowing is still on track to be higher in 2022-23 than last financial year, the £7bn increase in the deficit so far with only two months to go is far below the £44bn increase the OBR forecast for the full financial year in November.
The improvements have come largely from stronger than expected tax receipts. Self-assessed income tax receipts were £21.9bn last month, which was the highest January figure since monthly records began in April 1999 and one-third higher than in January 2022.
Receipts from value added tax were also up from last year. More money came in for the government from the pay as you earn income tax, reflecting the resilience of the labour market. The energy profits levy also provided an additional boost, pushing the central government’s current receipts to £107.8bn, an increase of £12.6bn, or 13.6 per cent compared with January 2022.
Tax revenues “have held up impressively” in the face of weak economic activity, noted Martin Beck, chief economic adviser to the EY Item Club.
The fall in wholesale energy prices in recent months should continue to bring down the cost of the Energy Price Guarantee. As interest rates are also expected to fall, borrowing in 2023/24 should significantly undershoot the OBR’s November forecast of £140bn, economists noted.
However, even energy costs were lower than expected. The government’s energy price subsidies cost £8.4bn in January, compared with the £9.5bn projected by the OBR.
Spending on central government debt interest reached £6.7bn, the highest January figure since monthly records began in April 1997, but lower than forecast by the OBR partly thanks to lower RPI inflation to which many gilts are linked.
The improvements will allow Hunt to freeze fuel taxes in his Budget costing £6bn, keep the energy price guarantee at £2,500 rather than the planned rise to £3,000 in April and provide money to ease settlements in public sector pay disputes.
The Treasury reacted with caution on Tuesday to the figures. Hunt said: “We are rightly spending billions now to support households and businesses with the impacts of rising prices, but with debt at the highest level since the 1960s, it is vital we stick to our plan to reduce debt over the medium term.”
