- Another month of strong tax receipts and a year-on-year fall in public borrowing present a positive backdrop to the Chancellor's Spring Statement on Wednesday. But high inflation and the consequences of geopolitical uncertainty signal tougher fiscal times ahead.
- The likelihood of a weaker economic forecast from the OBR implies a bigger deficit next year. And pressure on the Chancellor to pursue a more activist fiscal policy – from extra assistance for households to higher defence spending – points in the same direction.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“Although the public finances in February weren't helped by the effect of higher inflation in pushing up debt interest costs, this was more than compensated for by another month of strong growth in tax receipts. Total receipts came in at £71.9bn, more than £3bn higher than the £68.7bn forecast by the OBR last October. This left net borrowing in February at £13.4bn, a fall of £2.4bn from the same month in 2021.
“The deficit in the fiscal year-to-date was £138.4bn versus the OBR's forecast of £164.4bn. With one more month of 2021-2022 to go, borrowing in 2021-2022 is likely to come in at around £160bn, £23bn below the OBR's projection.
“But while the Chancellor can take heart from a decreasing deficit as he prepares for Wednesday’s Spring Statement, recent geopolitical developments point to a tougher 2022-2023. Rising energy and commodity prices means inflation this year is on course to exceed the OBR’s forecast by a significant margin. By depressing real income growth, high inflation will weigh on economic activity and employment, negatively affecting tax receipts. It will also add further to the interest cost of inflation-linked gilts. Borrowing may also be lifted if the Chancellor responds to recent calls for more fiscal activism to alleviate cost of living pressures, such as cutting fuel duty or raising benefits. With so many moving parts, and uncertainty over how much of the recent strength in tax receipts will prove persistent, predicting the medium-term fiscal outlook is tricky. But we won’t have to wait long for more clarity.”