It is always good to begin with some ‘good news’. The UK government recorded an unexpectedly large budget surplus in January, with revenues exceeding spending by £5.4bn. This was £5.0bn better than forecast by the Office for Budget Responsibility (OBR).
It would be daft to focus on just one month’s figures, but this continues a welcome trend. Total borrowing in the first ten months of the fiscal year 2022-23 was a mammoth £30.6bn below the OBR’s projections on a like-for-like basis. This reflects a number of factors, including the lower-than-expected cost of government help with energy bills, and buoyant tax receipts.
Of course, this is not entirely ‘good news’ for those who are now paying a lot more in tax. Nonetheless, this windfall for the Government is a reminder of one of the ways in which higher inflation can boost the public finances, via higher nominal incomes. Hopefully it is also another sign that the UK economy is proving more resilient than most had feared.
What’s more, borrowing is also likely to be much lower than currently forecast in the coming fiscal year 2023-24. A raft of official data and business surveys confirm that the economy is holding up much better than expected. Indeed, the dreaded ‘recession’ may well be avoided. Wholesale energy costs and market interest rates are both lower than the OBR had been assuming too.
The Chancellor will therefore have more room for tax cuts and targeted spending increases in the March Budget – if he wants to use it. However, the Treasury has already started to deploy two of its main counter-arguments.
First, the OBR reportedly told the Treasury last month that it intends to revise down its medium-term forecasts for economic growth. This could easily wipe out the existing ‘headroom’ of just £9.2bn against the target of getting underlying debt falling in five years’ time.
This would still allow the recent windfall to be used for some one-off measures, such as extending breaks on business rates, backdating pay increases for some key workers in the public sector, and extra short-term support with energy bills.
But the Treasury will argue that the recent improvement in borrowing (relative to expectations) is only temporary and therefore cannot be used to fund permanent tax cuts – or the cancellation of the planned increases in corporation tax.
Second, the Government has prioritised the fight against inflation. This has allowed the Treasury to argue that any tax cuts will have to wait until inflation is back under control. But this makes little sense. Inflation is set to more than halve this year anyway, regardless of what the Government does, as monetary conditions tighten and the impacts of past jumps in energy and food prices drop out of the annual rates.
There are also plenty of ways in which tax cuts could actually help to reduce inflation. For example, cuts in marginal rates of personal tax could tempt more people back into work and therefore ease labour shortages. Reducing the burden of corporate taxes should boost investment and productivity, thus improving the supply-side performance of the economy.
But running through all of this is an excessive dependence on forecasts and analysis from the OBR.
To be fair, forecasting the public finances is hard enough at the best of times. Government borrowing is the difference between two much larger numbers (annual spending and revenues are both over £1,000 billion), and there are a great many moving parts. Even £30bn would be an excusable miss in what has arguably been the worst of times.
Instead, the stronger and far more important point is that recent misses show the folly of relying too much on a single set of ‘official’ forecasts. It seems utterly bonkers to me – and many others – that the Treasury places so much weight on projections that are known to be unreliable. This leaves very little room for Chancellors to make their own judgements.
As is stands, the Government seems determined to press ahead with the planned increases in corporation tax in April. The risk is that this will maintain the old ‘doom loop’ of a rising tax burden, a weaker economy, and deteriorating public finances. Ironically, the OBR’s pessimistic forecasts might then be proved right – for all the wrong reasons.
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