- Despite a surprisingly disappointing outturn for October, public sector net borrowing remains broadly on track to reach the OBR’s full-year forecast of £183bn.
- The EY ITEM Club thinks the Office for Budget Responsibility’s (OBR) medium-term forecasts err on the side of caution. The EY ITEM Club therefore believes that there is a good chance that the public finances will outperform and that the Chancellor will eventually find he has more leeway against his fiscal rules.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“Public sector net borrowing came in at £18.8bn in October, only £0.2bn lower than a year earlier. The softer-than-expected performance reflected both slower growth in tax receipts and a rise in government spending. The latter was partly a function of higher debt servicing costs, caused by higher inflation, which more than offset the impacts of the closure of the furlough scheme and the end of the temporary uplift to universal credit.
“October’s outturn meant that over the first seven months of fiscal year 2021-2022 borrowing was £127.3bn, some £103.4bn or 45% lower than 2020-2021. If this undershoot was sustained over the remainder of the fiscal year, borrowing would come in at £178bn, just below the OBR’s forecast of £183bn. However, given that the public finances began to improve strongly in the latter part of the previous fiscal year, and that inflation will move higher over the coming months and further push up interest costs, the EY ITEM Club suspects the scale of the undershoots will tail off, so the OBR forecast looks reasonable.
“Taking a broader perspective, the EY ITEM Club continues to think the OBR’s medium-term forecasts err on the side of caution. Therefore, the EY ITEM Club believes there is a good chance that the public finances will outperform, and that the OBR will eventually conclude there is greater leeway against the fiscal targets than it currently thinks. So a loosening of the fiscal stance in the run up to the next election remains likely.”