Friday, March 1, 2024

UK Set to Undershoot Borrowing Forecast Despite Energy Costs

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Chancellor of the Exchequer Jeremy Hunt is on track to undershoot his borrowing forecast this year after official figures left him with £28.8 billion ($35.3 billion) of headroom with just one month to go.

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(Bloomberg) — Chancellor of the Exchequer Jeremy Hunt is on track to undershoot his borrowing forecast this year after official figures left him with £28.8 billion ($35.3 billion) of headroom with just one month to go.

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Despite a record deficit in February due to the cost of energy bill support for households, record self-assessed income tax receipts for the first two months of the year and past revisions left borrowing in the fiscal year to date at £123.6 billion, the Office for National Statistics said Tuesday. That compares with £116.8 billion a year earlier. 

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In this month’s budget, the Office for Budget Responsibility estimated that borrowing would be £152.4 billion for the year to March 2023. Both figures include the effect of student loan changes.

The ONS figures raise the prospect that the government will have headroom for further giveaways. In the budget, Hunt found room for around £20 billion a year more in business tax cuts and spending to bring people back to work. 

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“The news on the public finances may have raised the Chancellor’s hopes that he will be able to announce a pre-election giveaway later this year,” said Ruth Gregory, deputy chief UK economist at Capital Economics.

The public finances could still be thrown off course by turmoil in the banking industry, which this week caused the demise of Credit Suisse Group AG. That could prompt banks to rein in lending and tighten financial conditions, blunting the benefit of Hunt’s fiscal stimulus.

“The big risk is that a further escalation in the banking crisis causes a deterioration in the fiscal outlook as the hit to the public finances from weaker economic growth is only partially cushioned by lower gilt yields,” said Gregory. 

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Borrowing in February reached £16.7 billion ($20.5 billion), the highest for the month since records began in 1993 and higher than economists expected. It was more than double the £7 billion posted a year ago.

The surge was driven by cost of energy-support programs, which cost £9.3 billion in February. This included £2.9 billion in direct payments to households and £6.4 billion under the energy-price cap. 

The total bill for the support package has now reached £34 billion for the fiscal year with one month left to run, about half what the country spends on defense.

Debt Costs

Debt interest in February was £6.9 billion, £1.3 billion lower than last year. For the year to date, debt servicing costs rose to £102.6 billion, 48% higher than last year as a result of high interest rates and the effect of inflation-linked government bonds.

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But Prime Minister Rishi Sunak’s government could take hope from surging tax income that the full-year deficit would undershoot the newly revised official forecast. 

Self-assessed income tax receipts were estimated at £24.5 billion for January and February, the two months when they are paid. That was £5 billion more than the same period a year ago and the highest in any equivalent two-month period since records began in April 1999.

Over the same two-month period, capital gains tax receipts – another way in which the self-employed take income – reached £15.8 billion, another record high. 

The outlook for the public finances has improved in recent months, with tax receipts proving much stronger than thought and the OBR no longer predicting a recession. 

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“Borrowing is still high because we’re determined to support households and businesses with rising prices and are spending about £1,500 per household to pay just under half of people’s energy bills this winter,” Hunt said in a statement. “What will bring these costs right down is lower inflation, which is why it remains one of our top priorities.”

In his budget, Hunt chose to spend much of his windfall on giveaways to make child care more affordable and extend tax relief on corporate investment. That still left room for the OBR to lower its 2022-23 deficit forecast from the £177 billion forecast in November and trim borrowing projections for the years ahead.

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