Jeremy Hunt looks to have a £20billion warchest for tax cuts at the Budget after a surprise fall in borrowing last month.
Official figures showed the public sector was £7.8billion in the red in December, but that was the lowest figure since 2019 and significantly below the £11.4billion markets expected.
While the state of the government’s books remains grim, ministers welcomed evidence that UK plc is ‘turning a corner’.
And economists said it appears the Chancellor and Rishi Sunak have wriggle room, as they talk up the prospect of tax cuts in the Budget in March.
Capital Economics estimates that the ‘headroom’ against the government’s fiscal targets could be around £20billion by that point. That would be enough to maintain the freeze on fuel duty and take a penny off income tax.
Many Tories believe reducing the burden is essential if they are to have any hope of winning the election.
There is speculation that income tax and national insurance are their favoured targets, with hopes of inheritance tax being trimmed seemingly fading.
Official figures showed the public sector was £7.8billion in the red in December, significantly below the £11.4billion markets had expected
It suggests Chancellor Jeremy Hunt (pictured) might have a bit more wriggle room, as they talk up the prospect of tax cuts in the Budget in March
The interest that the Government paid on loans was £4billion last month, £14.1billion less than a year earlier
The interest that the Government paid on loans was £4billion last month, £14.1billion less than a year earlier.
That was largely because much of the debt is linked to the Retail Prices Index measure of inflation, which has dropped from its peak.
Total net debt was £2.69trillion at the end of the year, equivalent to around 97.7 per cent of GDP.
Despite the fall in net borrowing last month, the debt to GDP ratio is 1.9 percentage points above last December and still at levels not seen since the early 1960s.
‘Protecting millions of lives and livelihoods during Putin’s energy shock and a once-in-a-century pandemic has created economic challenges,’ said Chief Secretary to the Treasury Laura Trott.
‘However, it is right that we pay back these debts so future generations are not left to pick up the tab.
‘Because of this Government’s decisive action, the economy is now beginning to turn a corner. Inflation has more than halved.
‘Debt is on track to fall as a share of the economy. And we have been able to afford tax cuts for 27 million working people, and an £11 billion tax cut to drive business investment.’
Capital Economics said the Chancellor had been given ‘wiggle room for a big pre-election splash’.
It highlighted that borrowing in the prior months of the 2023/24 fiscal year had also been revised down by a total of £5billion.
‘After nine months of the 2023/24 fiscal year, borrowing is on track to undershoot the OBR’s full-year borrowing forecast of £123.9billion by £5billion,’ the analysts said.
‘What’s more, with market interest rate expectations and long-dated gilt yields having fallen since November, we suspect the OBR will revise down its borrowing forecast significantly from 2025/26.
‘That may provide the Chancellor with ‘headroom’ against his fiscal mandate of about £20billion in the Budget.
‘That will probably allow him to unveil a freeze in fuel duty in April 2024 (costing about £6billion a year) but perhaps also to announce more crowd-pleasing measures, such as a 1p cut to income tax (costing £6.9billion a year), while still maintaining fiscally prudent appearances.’
Cara Pacitti, Senior Economist at the Resolution Foundation, said: ‘Lower-than-expected inflation late last year has reduced debt interest costs and given the Chancellor a timely fiscal boost ahead of his Budget in March.
‘However lower inflation is also likely to mean lower tax receipts. How these factors offset each other will be important in deciding how much fiscal headroom the Chancellor has.’
While the state of the government’s books remains grim, ministers welcomed evidence that the economy is ‘turning a corner’