UK Public Finances Get Surprise Boost After Record January Income Tax Haul

UK five pound, ten pound, twenty pound, and fifty pound notes are shown with one pound coins in a file photo dated Jan. 26, 2018. (Dominic Lipinski/PA)

The UK government posted a monthly budget surplus in January despite its substantial spending commitments, due in part to record income tax payments.

According to the latest data from the UK’s Office for National Statistics (ONS), public sector net borrowing was in surplus by £5.4 billion ($6.5 billion) in January. The borrowing surplus was £7.1 billion less than in the same month in 2022, but was £5 billion larger than had been previously predicted by the Office for Budget Responsibility (OBR).

The budget surplus was partly driven by £21.9 billion of self-assessed income tax receipts for the month, which represented the highest total for January since monthly records began in 1999. The figure was £5.5 billion or one-third higher than in January 2022.

However, the high tax receipts were partly offset by substantial spending on the government’s energy support schemes.

In January, the government paid roughly £8 billion to energy suppliers under its price cap schemes, which caps the annual energy costs of average households at £2,500.

In addition, the fourth round of payments under the energy bills support scheme—which paid £400 to households over six months to help cut their bills—cost a further £1.9 billion.

According to the ONS, the UK government paid £6.7 billion in interest on government debt in January 2023, which was the highest January figure since monthly records began in April 1997. This comes after continued interest rate increases by the Bank of England, which has raised the base rate to 4 percent in its effort to rein in inflation.

January also saw a one-off £2.3 billion charge to the UK brought by the European Union, which was related to undervalued customs duties on Chinese footwear and textiles while the UK was a member state.

Compared with the same month last year, central government spending jumped by more than £20 billion to £103.6 billion.

In the financial year-to-January 2023, the UK’s public sector borrowed £116.9 billion, which was £7 billion more than in the same period last year but £30.6 billion less than forecast by the OBR.

Call for Pay Rises

The latest data on the UK’s public sector finances triggered calls for the government to improve its pay offers to public sector workers, many of whom have joined industrial action in disputes over pay and conditions.

Paul Nowak, general secretary of the Trade Union Congress (TUC), said the new financial situation means “the government is running out of excuses” not to offer an improved pay deal.

“(Chancellor) Jeremy Hunt must come out of hiding and help break the deadlock on public sector pay,” he added.

Public and Commercial Services Union general secretary Mark Serwotka said: “The government says it cannot afford to give our hard-working members a pay rise, but this morning’s news there is a surplus of £5.4bn changes that narrative.

“Ministers have no excuse for not putting some money on the table. If they don’t, our strikes will continue to escalate.”

Focus on Debt Reduction

But Chancellor Jeremy Hunt said he remains committed to reducing debt despite the improved monthly performance.

Hunt said: “We are rightly spending billions now to support households and businesses with the impacts of rising prices—but with debt at the highest level since the 1960s, it is vital we stick to our plan to reduce debt over the medium term.

“Getting debt down will require some tough choices, but it is crucial to reduce the amount spent on debt interest so we can protect our public services,” he said.

A Downing Street spokesperson also played down the prospect of tax cuts in the upcoming budget.

Prime Minister Rishi Sunak’s official spokesman said: “It’s important to understand the context. You would expect to see a surplus in January because of the timing of self-assessment receipts. The only January deficit since 2015 was in 2021 during the height of the pandemic.

“So we shouldn’t place too much emphasis on a single month’s data. Borrowing remains at record highs and there is significant uncertainty and volatility which poses clear risks to the fiscal position.”

The “overall focus on reducing the debt remains,” the spokesman added.

More ‘Fiscal Headroom’?

Economists are divided on whether the surprise surplus will mean the government can afford to be more generous than expected in the budget, which is to be unveiled next month.

Michal Stelmach, senior economist at KPMG UK, said: “Government spending on subsidies—which include the energy support—so far came in £6.8 billion below the £44 billion expected by the OBR this fiscal year, suggesting that milder weather and lower demand for gas have helped keep the cost down.

“Year-to-date borrowing has so far undershot the OBR’s forecast by £30.6 billion, which could tempt the chancellor to offer a pay increase to public sector workers as part of his budget next month, hoping to prevent another wave of strikes.

“Looking ahead, we estimate that the energy price guarantee is now likely to cost only around a half of the OBR’s £12.8 billion forecast in 2023-24, thanks to lower wholesale energy prices,” said Stelmach.

However, Martin Beck, chief economic advisor to the EY ITEM Club, stressed that better borrowing figures “may not translate into more fiscal headroom for the government.”

He said: “The extent to which the OBR deems the improvement in tax revenues to be structural is uncertain, and there’s a question mark over how it will adjust its estimates of the economy’s potential output growth in next month’s budget.”

PA Media contributed to this report.