UK borrows more than expected in blow to tax cut hopes

The UK government borrowed more than expected in March and the full fiscal year, according to official statistics that will be a disappointment for the chancellor as he weighs further tax cuts ahead of the general election.

Public sector net borrowing was £11.9bn last month, £4.7bn less than in the same period last year, the Office for National Statistics said on Tuesday. However, this was higher than the £10.2bn forecast by economists polled by Reuters.

In the full fiscal year to the end of March, borrowing was £120.7bn, £7.6bn less than in the same 12 months a year ago, but £6.6bn more than the £114.1bn forecast by the Office for Budget Responsibility, the fiscal watchdog, in March.

March’s figures showing borrowing overshooting what the OBR had predicted only a month ago cast “further doubt on the ability of the government to unveil big tax cuts at another pre-election fiscal event later this year”, said Ruth Gregory, economist at Capital Economics.

“If the chancellor was hoping March’s figures would provide more scope for tax cuts at a fiscal event later this year, he will have been disappointed,” she added.

Last week, chancellor Jeremy Hunt told the Financial Times he would like to cut taxes in an autumn fiscal event “if we can”. This is despite warnings from the IMF about Britain’s fragile public finances and rising debt trajectory.

Senior Conservatives said the Treasury was preparing for another fiscal event, which would depend on the timing of an election that must be called this year.

The party is trailing Labour by about 20 percentage points in opinion polls, according to the FT’s poll tracker.

The outlook for the public finances is further complicated by the recent rise in market interest rate expectations, which is likely to raise the OBR’s projections for the government’s debt interest costs.

Gregory calculated that based on the larger than expected 2023-24 budget deficit and the recent increase in the market’s expectation for interest rates, the chancellor may have even less so-called fiscal headroom, perhaps about £5bn, for tax cuts rather than the £8.9bn left over in March.

However, Rob Wood, economist at the consultancy Pantheon Macroeconomics, said that “revisions could easily change this picture in future months” and the latest data will have smaller implications for borrowing in five years’ time, when the chancellor’s headroom against his fiscal rules is judged. 

“We expect the chancellor to cut taxes again before a likely October or November general election despite borrowing overshooting his forecasts,” Wood added.

Public sector spending in the full fiscal year rose by £58.4bn compared with the same period last year as increased spending on public services and benefits outstripped large reductions in interest payments and energy support scheme costs.

However, public sector receipts were up by £66bn, boosted by a 7.5 per cent rise in tax receipts, which helped the overall deficit to fall.

Michal Stelmach, economist at the consultancy KPMG UK, noted that corporation tax receipts were up 19 per cent relative to the previous fiscal year, reflecting the increase in the tax rate from 19 per cent to 25 per cent and continued strength in company profits. He added that “elevated pay growth has also supported income tax receipts, despite the national insurance cut which came into force in January.”

Public sector debt, or borrowing accumulated over time, was about 98.3 per cent of GDP, the highest since the early 1960s.

“The next government will face a tricky choice between raising taxes to fix creaking public services or holding the line on the chancellor’s recent tax cuts,” said Wood.