Jeremy Hunt borrowed more than economists expected in November but they still predict the Chancellor has room to cut taxes by more than £10bn in spring.
Higher welfare spending and debt interest costs meant the Treasury’s borrowing bill was higher than expected despite greater tax receipts.
Public borrowing stood at £14.6bn last month, according to the Office for National Statistics (ONS).
While this is £0.9bn less than the same period last year, it is higher than economists’ estimates of £13bn.
It means borrowing so far this year stands at £116.4bn, £24.4bn higher than the same period in 2022 and the second-highest year-to-November borrowing on record.
Statisticians revised up their estimate of October borrowing alone from £14.4bn to £16bn.
Despite the blow, economists said falling inflation and expectations that the Bank of England will cut interest rates as soon as March will provide a huge boost to the public finances, giving Mr Hunt more wiggle room to cut taxes before the election.
Samuel Tombs at Pantheon Macroeconomics expects the Chancellor’s so-called headroom to double to about £25bn if a drop in UK borrowing costs is sustained.
Inflation fell to 3.9pc in November, from 4.6pc in October, sparking a frenzy of bets on lower interest rates.
This suggests Mr Hunt will have more than £10bn to cut taxes while still maintaining existing headroom.
The Office for Budget Responsibility (OBR), the Government’s tax and spending watchdog, now believes borrowing will hit £128.3bn this financial year.
Ashley Webb, an economist at Capital Economics, said November’s higher deficit was just a temporary setback. “We doubt this will prevent the Chancellor from embarking on a pre-election fiscal splash in the Spring Budget,” he said.
UK benchmark 10-year gilt yields are a full percentage point lower than they were ahead of the Autumn Statement last month.
However, Mr Webb said pre-election giveaways were likely to be followed by pain from the next government: “The recent drop in market interest rate expectations supports our view that interest rates will be lower in 2025 than the OBR predicted in November.
“As a result, we expect this to give the Chancellor more wiggle room. But this would almost certainly be followed by hefty tax rises in 2025 after the election.”
British workers still face a big squeeze on their finances in the coming years. The ONS said higher inflation helped to lift tax receipts, particularly income tax and VAT, as higher shop prices and a six-year freeze in personal tax thresholds forced people to hand more of their cash to the taxman.
However, this was more than offset by public spending, with inflation also lifting wages and benefits, the latter rising by 10.1pc in April.
The ONS said: “In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost of living payments.”
However, energy subsidies decreased as the Government moved away from blanket support for energy bills, helping to save the Treasury some cash.
The figures also showed public sector net debt excluding stood at 97.5pc of GDP. The ONS said: “This is 1.8 percentage points higher than in November 2022 and remains at levels last seen in the early 1960s.
Mr Tombs agreed that the Chancellor was likely to be “relatively restrained with pre-election bribes” after seeing the “unfavourable market reaction to the national insurance tax cut” as borrowing costs rose.
He said “We think that he will decide that it is best to promise tax cuts in the next parliament and to give the Bank of England scope to reduce interest rates now by largely sticking to his plans for a large fiscal consolidation in 2024-25.
“Accordingly, we expect a net giveaway of about £10bn to £15bn in the Budget, and the Monetary Policy Committee to conclude shortly afterwards that it can begin to reduce Bank Rate.”
Responding to the borrowing figures, Laura Trott, the Chief Secretary to the Treasury, said it was important to get debt down.
She said: “It was right to spend billions protecting people during the pandemic and the energy shock triggered by Putin’s invasion of Ukraine, but we cannot leave our children and grandchildren to pick up the tab.
“That’s why the Prime Minister has made reducing debt a top priority. We are taking difficult decisions in the national interest to control our borrowing needs and improve productivity, so that we deliver the public services people need while keeping inflation down.”
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2023-12-21 09:01:00Z
CBMiZGh0dHBzOi8vd3d3LnRlbGVncmFwaC5jby51ay9idXNpbmVzcy8yMDIzLzEyLzIxL2plcmVteS1odW50LWhpdC1oaWdoZXItdGhhbi1leHBlY3RlZC1ib3Jyb3dpbmctYmlsbC_SAQA
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