(Bloomberg) -- UK government borrowing is running 15% below forecasts, giving Chancellor of the Exchequer Jeremy Hunt more room to announce tax relief measures this week, although a surge in debt last month underscored concerns about the direction of the public finances.
The budget deficit in the first seven months of the fiscal year was £98.3 billion ($123.15), the Office for National Statistics said Tuesday, £16.9 billion less than had been forecast in March. While the data left Hunt in a stronger position on the eve of his much anticipated Autumn Statement, a bigger-than-expected spending gap in October showed the challenge he’ll face in convincing the public about the long-term sustainability of the government’s plans.
The pound was little changed after the data, holding near the highest since September.
Members of the ruling Conservative Party have been urging Hunt to relieve the UK’s tax burden — which has soared to the highest level since the end of World War II — ahead of an election likely to be held next year. The Autumn Statement on Wednesday, along with the annual budget address in March, is one of Prime Minister Rishi Sunak’s last big chances to narrow his polling deficit against the Labour Party before voters go to the polls.
Treasury coffers are enjoying a surprise boom in tax receipts as high inflation boosts wages, company profits and the value-added tax base. Overall, tax receipts were £13 billion higher for the first seven months than the OBR forecast in March. Receipts from VAT, income tax and corporation tax are are all about 10% higher.
The increase more than offset a £6.1 billion spending overshoot, as welfare benefits, debt payments and public sector pay rose. On Monday, Sunak signaled that he and Hunt and planning to use the extra leeway to announce tax cuts this week, saying the government can begin reducing the tax burden in a “serious, responsible way” after hitting a goal to halve inflation this year.
“At my Autumn Statement tomorrow, I will focus on how we boost business investment and get people back into work to deliver the growth our country needs,” Hunt said in a statement. “We met our pledge to halve inflation, but we must keep on supporting the Bank of England to drive inflation down to 2%. That means being responsible with the nation’s finances.”
Bloomberg Economics expects new OBR forecasts to show the deficit coming in around £20 billion lower than the £131.6 billion predicted by the Office for Budget Responsibility in March. Economists estimate that Hunt’s margin — his so-called headroom” — is more than double the record-low £6.5 billion previously forecast.
Still, public debt was £2.64 trillion at the end of October, around 97.8% of GDP and the highest since the 1960s. Such underlying pressures have led some, such as accounting body ICAEW, to caution that any calculation showing enough so-called headroom for budget giveaways would be “an illusion.”
“Cash going out continues to exceed cash coming in by a very large margin,” said Alison Ring, director of public sector and taxation at the ICAEW. “There is no headroom when the public finances continue to be on an unsustainable path without a long-term fiscal strategy to fix them.”
Borrowing in October was £14.9 billion, the second-highest for the month on record and more than the £12.8 billion median forecast in a Bloomberg survey of economists. Debt interest hit £7.5 billion, an October record. More than half the cost related to inflation uprating of index-linked gilts.
Revisions to past data also lifted borrowing for the previous six months by £1.7 billion, as the ONS reduced its estimate of income tax and corporate tax take, which was partially offset by less spending.
Welfare benefits were £4.5 billion higher than a year earlier — an increase of 22%. Public sector pay was up £1.2 billion, an 8.1% increase, following settlements reached earlier in the year.
The Treasury also made a £9.1 billion transfer to the Bank of England to cover losses on the quantitative easing portfolio, which the state indemnifies. A total of £38 billion has now been paid to the BOE since October last year.
Michal Stelmach, senior economist at KPMG UK, warned that “the short-term improvement in the fiscal position this year will likely prove unsustainable over the next five years” as the prospect of persistently higher interest rates will “more than offset any windfall over the medium term.”
(Updates with market move in third paragraph.)
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