UK's Lower Borrowing Opens Door to Tax Cuts
In a surprising turn of events, the Office for National Statistics (ONS) reported a significant decrease in government borrowing for December, igniting speculation about potential tax cuts in the upcoming budget. Borrowing, the gap between government spending and tax income, fell to £7.8 billion, marking the lowest figure for the month since 2019.
The substantial drop-in interest payments played a pivotal role in this development, attributed to the rapid decline in inflation. Interest payments on government debt plummeted to £4 billion, a substantial £14.1 billion reduction compared to December 2022. The government's interest payments are intricately linked to the Retail Prices Index measure of inflation.
Chancellor Jeremy Hunt, who hinted at tax cuts during his recent appearance at the World Economic Forum in Davos, is now under increased pressure to deliver on these promises in the March budget, preceding an anticipated general election later in the year.
December's borrowing figure, £8.4 billion less than the previous year, reflects a positive trend. Analysts suggest that this surplus could provide the chancellor with additional leeway for potential tax cuts, especially considering the lower inflation rates experienced in the past year.
Ruth Gregory, Deputy Chief UK Economist at Capital Economics, highlighted that the better-than-expected figures for December offer the chancellor "a bit more wiggle room for a big pre-election splash in the spring Budget on 6 March."
The nine-month borrowing total until December 2023 reached £119.1 billion, exceeding the previous year by £11.1 billion but falling below the forecast by the government's economic watchdog, the Office for Budget Responsibility (OBR).
Martin Beck, Chief Economic Adviser to the EY Item Club, predicts a substantial reduction in predicted spending on debt interest, allowing room for high-profile tax cuts in the spring budget. This aligns with expectations of a potential freeze in fuel duty and a 1p cut to income tax.
Despite the positive economic indicators, total government debt stands at £2.67 trillion, equivalent to 97.7% of the UK's GDP. Both conservative and opposition voices weigh in on the matter, emphasizing the need for responsible fiscal policies while acknowledging the economic challenges faced during the pandemic and geopolitical events.
