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The UK government racked up its biggest monthly surplus on record in January, teeing up a better than expected position in the current fiscal year as Jeremy Hunt comes under pressure to deliver pre-election Budget tax cuts.
The public sector recorded a surplus of £16.7bn, according to the Office for National Statistics on Wednesday. The figure was shy of forecasts for a surplus of more than £18bn, but still double the figure this time last year.
The numbers left borrowing in the financial year to date £9.2bn lower than previously forecast by the Office for Budget Responsibility thanks to lower than expected debt interest payments and revisions to earlier months’ numbers.
Hunt, who will deliver his Budget on March 6, is under pressure from Tory MPs to find space for giveaways as the governing Conservative party trails Labour in opinion polls ahead of a general election expected later this year.
In his Autumn Statement in November, the chancellor cut business and personal taxes by £20bn, and has indicated he would like to be in a position to do more at the Budget. However, Treasury insiders have recently sought to damp expectations that the chancellor will have a large amount of fiscal room for giveaways.
Hunt’s scope for tax cuts hinges in part on the scale of the “headroom” he has against his self-imposed fiscal rule, which requires the ratio of public debt to gross domestic product to be falling year on year in five years’ time.
Ruth Gregory, an economist at Capital Economics, said the ONS numbers would provide the chancellor with good news in the lead-up to the Budget, but added they would not pave the way for a “big pre-election splash”.
“Despite January’s surplus, the chancellor will probably have limited headroom,” she said.
The measures outlined in the Autumn Statement left the chancellor a projected £13bn of headroom, according to November estimates. Capital Economics estimates the headroom against the chancellor’s fiscal rule will be about £15bn, only a little more than was previously forecast.
Other economists have larger estimates, with the Resolution Foundation think-tank putting the probable headroom figure at about £23bn. However, analysts have warned any tax reductions would probably come on the back of “implausibly” large real-terms reductions in departmental spending after the election.
January’s surplus was the largest since monthly records began in 1993 in nominal terms, the ONS said. It reflected inflows of income tax and capital gains taxes, but also a reduction in the interest payable on government debt to £4.4bn in the month. The figure was £3.5bn less than in January 2023 and £2.7bn less than forecast by the OBR, the fiscal watchdog.
Downward revisions to previous months’ figures meant public sector net borrowing in the financial year to January was £96.6bn, the ONS said, about £9.2bn less than was forecast by the OBR in November.
“While we will not speculate over whether further reductions in tax will be affordable in the Budget, the economy is beginning to turn a corner, with inflation down from over 11 per cent to 4 per cent,” said Laura Trott, chief secretary to the Treasury.