(Bloomberg) — UK government borrowing is running 15% below official forecasts, setting the stage for Chancellor Jeremy Hunt to announce fiscal giveaways in his Autumn Statement on Wednesday.
The budget deficit in the first seven months of the fiscal year was £98.3 billion ($123.15), £16.9 billion less than the Office for Budget Responsibility had forecast in March.
The shortfall in October alone was £14.9 billion, the Office for National Statistics said, the second-highest October deficit on record and more than the £12.8 billion median forecast in a Bloomberg survey of economists.
Welfare, debt interest and public-sector pay all contributed to the October overshoot.
Welfare benefits were £4.5 billion higher than a year earlier — an increase of 22%. Debt interest hit £7.5 billion, an October record and £2.6 billion more than the OBR forecast. Over half the cost related to inflation uprating of index-linked gilts.
The pound rose for a third day in a row, reaching its highest since Sept. 11 against the dollar. The move may also reflect comments from Bank of England Governor Andrew Bailey, who said last night that interest rates may have to rise again if food and energy prices feed inflation.
Public sector pay was up £1.2 billion, an 8.1% increase, following settlements reached earlier in the year.
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. That more than offset a £6.1 billion spending overshoot.
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.
Bloomberg Economics expects new OBR forecasts to show the deficit coming in around £20 billion lower than the £131.6 billion predicted in March.
However, for Hunt — under pressure to cut taxes to lift the Conservatives ahead of an election expected next year — what matters more is the amount of headroom he is judged to have in five years when his fiscal rules bite.
Economists estimate that the margin is more than double the record-low £6.5 billion estimated by the OBR in March.
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.”
On Monday, Prime Minister Rishi 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.”
Public debt was £2.64 trillion at the end of October 2023, around 97.8% of GDP and the highest since the 1960s.
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.
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