LONDON — The United Kingdom is borrowing a lot less than it expected to when Chancellor Jeremy Hunt put together his budget late last year.
That’s the good news. The bad news is that it doesn’t really give Hunt any more scope to lighten the heaviest tax burden in decades before the next election.
Higher-than-expected tax receipts kept public-sector borrowing down to £4.3 billion in July, with receipts from self-assessment coming in nearly 20 percent ahead of the Office for Budget Responsibility’s forecasts of £9.9 billion. That also bodes well for August’s data, given that self-assessment payments usually straddle those two months.
As a result, the government has borrowed £56.6 billion in the first four months of its fiscal year, a big rise from last year but well below the OBR’s forecast of £68 billion.
That’s mainly a result of two things, analysts said: First, the economy has performed better than expected, avoiding the recession that was expected after Russia’s invasion of Ukraine in February 2022; second, it reflects the fact that inflation has been higher than forecast ― not least wage inflation, which has puffed up income-tax receipts.
The figures also reflect the “fiscal drag” from the government’s freezing of tax allowances and thresholds last year, Douglas McWilliams, deputy chairman of the Center for Economic and Business Research consultancy, told POLITICO. That, combined with record wage growth in recent months, has brought more and more people into higher tax brackets — just as Hunt intended back in October when his most pressing task was to reassure financial markets that the government would keep the budget deficit under control.
“The consequences of freezing (allowances and thresholds) are higher than they would have been had inflation been lower,” McWilliams said.
Other things being equal, a deficit undershoot would normally make a few pre-election giveaways easier for the government. However, that seems unlikely this time around. Panmure Gordon chief economist Simon French tweeted that it would be a brave chancellor who cut taxes for the coming year on the basis that last year’s forecasts got inflation wrong. The risk of a renewed “puke” in the government bond market ― a fresh bout of volatility ― would be too high, French argued, given the traumatic memories of last year, when Hunt’s predecessor Kwasi Kwarteng tried to cut taxes.
The government’s borrowing costs have in recent days hit new 15-year highs, topping even the levels seen at the height of last year’s panic. However, analysts have put that down largely to the gravitational pull of U.S. Treasury yields, which have also risen through the summer as investors have priced in expectations that global interest rates will have to stay higher than thought for longer than thought in order to tame inflation.
The benchmark 10-year gilt yield was steady at 4.73 percent by early afternoon in London, while the pound was slightly lower against the dollar.
But even without tax cuts, there is at least one silver lining for Hunt and his party: The spike in the U.K.’s debt-servicing costs is likely to unwind from now on, as the fall in headline inflation reduces the interest payable on index-linked gilts. These account for around a quarter of the overall gilt market. In the last four months alone, the government has paid some £22.6 billion in inflation-linked interest, ONS figures show.
