UK borrowing figures point to more fiscal tightening to come
Rising expectations that the UK government might substantially loosen the tax burden in the run-up to next general election will have been pegged back this morning by the latest borrowing figures. Public sector net borrowing excluding the cost of bailing out the public sectors came in at £14.9bn in October, a modest increase on September’s upwardly revised print of £14.6bn, but considerably higher than market expectations for a £12.8bn reading. And perhaps most worryingly is the fact government borrowing is going in the wrong direction. It is very much a reminder that the task of putting the public finances back on a sustainable footing is far from over and that the government actually has very little fiscal slack to play with ahead of the next election. In addition, the estimate of borrowing in the first half of the 2023/24 tax year was revised upwards from £81.7bn to £83.4bn, predicated largely on central government spending exceeding the Office for Budget Responsibility’s (OBR) forecast by £5.5bn as the high level of inflation saw government debt interest payments and public sector wage rises exceed expectations.
Even with the upwards revision to the H1 borrowing estimate, borrowing to end-October remains £16.9bn under the OBR’s initial forecast, suggesting that on current trends total borrowing for the year could end up some £20bn below expectations. However, with higher public sector wage deals set to impact government spending over the remainder of the fiscal year, plus the overly optimistic growth forecasts the OBR used in its forecasts (0.4% in Q4 and 0.5% in Q1), and interest rates also being higher than expected to boost interest payments, the deterioration in borrowing seen last month looks set to be the pattern for the remainder of the year. Accordingly, the promises we have been hearing from the UK government that tomorrow’s Autumn statement will be the start of a tax cutting agenda look to be rather hollow, and certainly not large enough to have any material impact on the UK’s growth outlook going forward. Furthermore, it has already been made clear than any cuts will be funded by cutting back on spending in other areas, most notably by reducing social security payments through a combination of tightening up eligibility criteria and restricting annual uplifts to less than expected.
Finally, Q1 next year will see the cessation of the Cost of Living payments brought in to assist lower income households with the cost of living crisis, while the continued freeze on most tax threshold levels, such as income tax and national insurance bands, will continue to drag more taxpayers into higher tax bands. Accordingly, whatever is unveiled in the Autumn statement tomorrow, it is difficult to see how the government cannot plan to tighten fiscal policy further going forward if the fiscal position is to be brought under control.