Hunt Gets Room to Maneuver as UK Deficit Comes In Below Forecast

UK government borrowing came in £13.2 billion ($16.5 billion) below official forecasts last fiscal year, leaving Chancellor of the Exchequer Jeremy Hunt modest room for giveaways ahead of the next general election.

(Bloomberg) — UK government borrowing came in £13.2 billion ($16.5 billion) below official forecasts last fiscal year, leaving Chancellor of the Exchequer Jeremy Hunt modest room for giveaways ahead of the next general election. 

Despite another month of huge subsides for energy bills in March, buoyant tax revenue left the budget deficit for 2022-23 as a whole at £139.2 billion, or 5.5% of gross domestic product, the Office for National Statistics said Tuesday. 

That’s higher than in 2021-22 but less than the £152.4 billion forecast by the Office for Budget Responsibility last month. For March alone, borrowing was £21.5 billion, the second highest for the month on record but in step with economists’ expectations.

Hunt, who last month handed out £20 billion a year more in business tax cuts and spending to bring people back to work, will find there is no shortage of claims on his additional fiscal headroom.

Public-sector workers are waging the worst strikes in decades to press their demands for inflation-matching pay rises. Meanwhile, rank-and-file Tories fear a backlash at the election unless Sunak and Hunt cut taxes, which are now at their highest share of the economy since World War II.

But while the outlook for the economy has brightened, risks abound, including the drag from higher interest rates and tighter financial conditions in the wake of recent strains in the global banking sector. 

Government net debt at the end of March stood at £2.53 trillion, or 99.6% of GDP – the highest ratio since the early 1960s.

The undershoot compared with forecasts provides the second fiscal boost for Hunt in recent days after credit-rating agency Standard & Poor’s on Friday upgraded its outlook for the UK. It raises the prospect of further tax cuts or spending increases as Prime Minister Rishi Sunak tries to revive the Conservatives’ fortunes before a national vote due by January 2025 but likely earlier.

Hunt signaled his determination to restore health to the public finances, making it less likely he’ll use the windfall for more largess popular with voters.

“These numbers reflect the inevitable consequences of borrowing eye-watering sums to help families and businesses through a pandemic and Putin’s energy crisis,” Hunt said in a statement. “We cannot borrow forever. We now have a clear plan to get debt falling which will reduce the financial pressure we pass onto our children and grandchildren.”

Britain’s ruling Conservative Party is more than 10 percentage points behind the Labour opposition in opinion polls.

The public finances were hit hard by a large spike in debt interest costs and the cost of helping households with their energy bills and other one-off cost of living measures. Debt interest hit a record £106.6 billion, up 47% from a year ago. The cost of energy support measures reached £41.2 billion.

Energy Support

This included a final £1.9 billion in direct payments to households in March and £6.1 billion under the energy-price cap.

Michal Stelmach, senior economist at KPMG UK, said the figures suggested “choppy waters ahead for the public finances.” Stelmach added, “While the UK is not unique in facing pressures on the public finances, with recent shocks being largely global in nature, we estimate that around a quarter of the increase in gilt yields over the past year could be attributed to UK-specific factors.”

Other cost-of-living payments contributed to an 8.1% increase in welfare benefits over the year, which the government boosted in response to Russian President Vladimir Putin’s decision to choke off natural gas supplies to Europe.

Inflation has also driven up the cost of the servicing the national debt as payments on around a quarter of outstanding government bonds are linked to the Retail Prices Index. 

The chancellor was helped by strong tax receipts, which rose 10.5% in the year to £929 billion, helped by big increases in taxes on income, VAT and corporations. Excluding fiscally neutral transfers from the Bank of England’s Asset Purchase Facility, receipts were up 11%.

For the first time, the ONS published a balance sheet estimate of the UK government’s net worth, a measure of what the state owns and what it owes. The ONS found that the government has a net liability of £606 billion. 

The UK is one of only a few advanced economies whose liabilities, such as public sector pensions, are larger than its assets like public infrastructure, according to the Organization for Economic Cooperation and Development.

The BOE’s quantitative easing portfolio of gilts made its largest monthly loss on record, of £1.58 billion as the cost of paying interest on the commercial bank reserves it created was higher than the income from the government bonds it bought.

For the full year, the program cost was £3.8 billion. The Treasury has transferred billions of pounds to the BOE in recent months to cover losses. Until interest rates started rising, the BOE transferred around £120 billion to the Treasury since 2009.

(Updates with details from the report and charts.)

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