UK Borrowing Better Than Expected, Yet Tax Cuts Remain Uncertain

The UK government’s recent borrowing numbers have shown a pleasant surprise, but it’s not all rosy. While borrowing was less than anticipated, the chance of any significant tax cuts ahead of a general election seems slim. Bloomberg breaks down what this means for everyday people in the UK.

A Glimmer of Good News

The good news first: the UK’s borrowing for the first five months of the fiscal year was less than what experts had forecasted. Specifically, between April and August, the UK borrowed £69.6 billion. This is a whopping £11.4 billion less than what the Office for Budget Responsibility (OBR) had predicted earlier in March.

However, it’s not all positive. Borrowing for August stood at £11.6 billion, which is actually an increase from the £8.1 billion borrowed in the same month last year. In terms of historical context, our government debt is now nearly 99% of our entire GDP. We haven’t seen numbers like these since the 1960s.

Where’s the Money Coming From?

Interestingly, the money the government borrowed between April and July had to be revised upwards by £1.5 billion. This isn’t because of more borrowing, but because tax receipts (money collected from taxes) turned out to be higher than previously estimated. In fact, tax revenues have been coming in stronger than expected, which is where a portion of this optimism stems from.

Some members of the ruling Conservative Party believe this increase in tax revenue is a sign that taxes should be cut, especially with the increasing cost-of-living pressures on the general public.

What’s the Future of Tax Cuts?

Most households look forward to tax reductions, especially when general elections are on the horizon. But according to experts like Samuel Tombs, chief UK economist at Pantheon Macroeconomics, significant tax cuts may remain elusive. Chancellor Jeremy Hunt, who oversees the country’s finances, has indicated that any tax cuts announced in his autumn statement would be minimal and would likely be matched by reductions in government spending.

Hunt justifies this by stating the importance of managing the country’s finances, especially during times when inflation is high. High inflation rates can push up interest rates, making it challenging to manage national debt.

The Interest Rate Dilemma

The cost of interest on the national debt was £5.6 billion in August 2023. Thankfully, this was £2.2 billion less than the OBR’s estimate and significantly lower than the previous year. But rising interest rates, paired with the threat of a recession, make the task of managing debt even more complex.

There’s also talk in financial circles that the Bank of England might soon stop increasing interest rates, which would be a relief for the public purse, which is weighed down by the costs of debt.

The Challenges Ahead

While the borrowing situation has shown improvement, other expenses continue to rise. Welfare costs, for example, have gone up by £2.7 billion compared to last year, largely due to the inflation-linked increase in 2023. The year-to-date benefits cost stands at an increase of £13.9 billion, and public sector pay has also seen an increase of £9.4 billion compared to the previous year.

Controlling these expenses, especially welfare costs, remains a hurdle. The state pension is set for another considerable hike next year, and the costs associated with health and welfare due to the ongoing health crisis in the UK is adding over £15 billion to the state’s annual bill.

In Conclusion

Though the borrowing situation might seem a tad brighter, the road ahead for the UK’s finances remains uncertain. As Michal Stelmach, a senior economist at KPMG UK, put it, the government might soon have to decide between raising taxes or cutting back on spending – neither of which are popular choices. Amid these challenges, the possibility of significant tax cuts before the upcoming general election seems doubtful.