UK public borrowing figures overshoot their target in February

The UK delivered a disappointing set of government borrowing figures today, showing net borrowing (excluding public sector banks) of £8.4bn in February, a sizeable overshoot on the £6bn figure expected, and bringing total borrowing for the 2023/24 fiscal year so far to £106.8bn, perilously close to the £114.1bn limit forecast for the whole year. Although February’s borrowing figure was lower than the £11.8bn recorded in the same month last year, the aggregate numbers suggest the government is likely to overshoot this full year borrowing target next month, the final month of the fiscal year; borrowing will need to be £7.3bn or less to ensure the figure is not breached, which when viewed in light of the March 2023 borrowing requirement of £16.9bn, seems unlikely.

If the current trend in government borrowing compared to the projections laid out in last November’s Autumn Statement by the Office for Budget Responsibility (OBR) is maintained, then borrowing is set to exceed its target by around £4.5bn. That is not a huge figure in the grand scheme of things and as such the markets will not be unduly concerned yet about the underlying fiscal position. It all rests on the size of the March deficit, plus of course likely revisions that will also change the final picture. However, the numbers do highlight the intense pressure government finances are under and suggest there is little room for any further tax cuts to be delivered in an Autumn Statement this year, should the government choose to hold one before the required general election given that it represents the last opportunity it will have to garner favour with voters before going to the polls.

February’s borrowing figure could have been higher had it not been for the larger than expected reductions seen in RPI, against which some 25% of government borrowing is indexed, and which acted to lower debt repayments by some £1.1bn. Rather, it was higher than expected spending that saw borrowing overshoot its target, with social security benefits the chief culprit here as they saw sizeable cost-of-living uplifts.

The overall deficit is still forecast to continue falling to less than £40bn by 2028/29 (the Chancellor’s fiscal ‘rule’ is for debt to be falling as a share of the economy in five years time), and it is this ‘rule’ that may actually ride to the Chancellor’s rescue this year and provide the room for tax cuts. If another Autumn Statement is indeed held before the forthcoming general election, then the OBR will extend its forecasts out to 2029/30. This allows the Chancellor to present cuts in public spending that will take place in the intervening period which, regardless of whether they are realistic or not, will provide the fiscal headroom to cut taxes further this year. The downside is that the next government will face the difficult task of sticking to these unrealistic spending cuts or raising taxes to fill the inevitable funding gap that will have been created. In practice, it appears almost inevitable that the tax burden will need to be increased in the next Parliament.

For the UK economy, it means the era of high spending and high taxation is far from being over soon. And in a consumer driven economy such as the UK, growth is therefore likely to struggle to gain much momentum going forward as consumers are forced to continue surrendering an ever-larger share of their incomes to the government.