To what extent have the public finances really been brought under control? This morning’s update from the Office for National Statistics reveals that public sector net borrowing reached £16.7 billion in February. This is more than double the figure from February 2022 of £7.1 billion, and also well above the consensus estimate of around £11 billion.
It is the highest February borrowing figure since records began, primarily driven upward by the Energy Price Guarantee, which continues to see the government cap the unit price of energy and subsidise the rest. Last February, Russia was only starting its illegal invasion of Ukraine; now the public sector net borrowing figure reflect all that’s been done to tackle yo-yoing energy costs, trying to keep bills manageable for the public.
But despite this new record high, there is some good news in today’s update. While February’s figures soared, cumulative borrowing for the fiscal year is still £20 billion below what the Office for Budget Responsibility forecast it would come to at last week’s fiscal event. Perhaps even more importantly, changes in the Retail Price Index and tax receipts suggest the government may have more wriggle room than originally thought.
Government’s debt interest payments came out to £6.9 billion for the month: significantly higher than they were pre-pandemic, but £1.3 billion less than February 2022. Furthermore, total tax receipts reached £77.8 billion, £5 billion higher than last year. With the overall tax burden now at a post-war high, it’s not surprising that more revenue would be flowing to the Treasury. The question now is what exactly the chancellor plans to do with the extra cash.
Understandably there are renewed calls for tax cuts this morning, as it seems Jeremy Hunt may have more flexibility than he even thought a week ago to reduce the tax burden. But three issues will continue to weigh on the chancellor’s mind, as he considers borrowing for tax cuts. First, while his headroom for tax cuts may look better today than it did last week, it is still fairly minimal, as Hunt left himself very little room last week, especially to get the debt falling as a percentage of GDP: ‘the smallest amount of headroom any Chancellor has set aside against his primary fiscal target’, according to the OBR.
Second – about that net debt. Today’s figures confirm what we already knew from the Budget last week: that while Hunt may be set to make to make good on his (very loose) fiscal rule to have debt as a percentage of GDP falling within five years, the overall amount of debt is heading in only one direction: up. This graph directly clashes with Rishi Sunak’s third pledge to ‘make sure our national debt is falling.’ It is currently on no trajectory to do so.
Lastly, external factors affecting Britain’s economy may lead the chancellor to continue his cautious approach towards the public finances. The past week’s banking scare, which resulted in the collapse of Credit Suisse, will have acted as reminder of just how volatile parts of the global economy are in the aftermath of Covid (and in the wake of rising interest rates). Just because Britain’s public finances aren’t currently spooking the markets doesn’t mean that yet another scare won’t occur that could risk wiping out the confidence Hunt has been trying to build.
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