The Treasury, in its ambition to cut taxes in the election year, has dealt a blow as the borrowing for the past year was recorded to be higher than expected.
Borrowing in March was £11.9 billion, £4.7 billion less than in the same month last year, but £10 billion higher than estimated by economists.
Given the higher-than-forecast borrowing, any announcement of new tax cuts by Chancellor Jeremy Hunt could raise questions among economists and politicians.
Jessica Barnaby, deputy director for public sector finances at the Office of National Statistics (ONS), said that the latest national debt figures will not stop Mr. Hunt from “looking to cut taxes later this year in the run up to the general election.”
The chancellor is expected to slash taxes again before the general election, likely to take place in the autumn, despite borrowing overshooting his forecasts.
“Hunt can plan for another year of unrealistically weak public spending to generate ‘headroom’ against his fiscal rules and thereby manufacture the funds to cut taxes. The next government will, therefore, face a tricky choice between raising taxes to fix creaking public services or holding the line on the chancellor’s recent tax cuts,” suggested Rob Wood at Pantheon Macroeconomics.
The Labour Party, likely to win the next election according to voting intention polls, has been critical of unfunded tax cut policies.
“Empirical evidence shows that fiscal policy tends to be looser, and slippages larger, during election years, reflecting a ‘political budget cycle,’” the IMF said in its outlook, published last week.
Fiscal Headroom
Reacting to the latest borrowing figures, a Treasury spokesman said, “Debt increased in recent years because we rightly protected millions of jobs during Covid and paid half of people’s energy bills after (Vladimir) Putin’s invasion of Ukraine sent bills skyrocketing.”To get the debt falling, the government must stick to its plan, the spokesman added.
Net investment spending was up by £58.0 billion to £121.7 billion, the ONS reported. Ms. Barnaby said that increased spending public services and benefits outstripped large reductions in interest payable and energy support scheme costs.
In March, the central government’s total expenditure was £102.5 billion, £0.4 billion less than in March 2023. However, it included increases in social benefit payments that grew by £3.5 billion, triggered by inflation-linked uprating.
Inflation also increased running costs and led to a £2.2 billion surge in spending on goods and services.
The government raised £90.6 billion in receipts, which was £6.6 billion than in March 2023. Increases in Income Tax, Corporation Tax and Value Added Tax receipts contributed to the overall figure.
Mr. Hunt has indicated that any decisions on tax cuts will be taken “responsibly” and if the fiscal headroom allows it.
“The government wants the UK to have a fair and internationally competitive tax system, focused on attracting talented individuals and investment that contribute to the growth of the economy,” said the Treasury.
The statement was part of the government’s Spring budget policy paper, which outlined plans to abolish the non-dom tax status from April 2025. The tax reform will raise £2.7 billion per year by 2028-2029, added the Treasury.
