Public finances continue to outperform expectations – EY ITEM Club comments

• The final set of public finances data before the Spring Budget saw the Government achieve a smaller surplus than in January 2022, but one that was much higher than the OBR's forecast. The better-than-expected performance was mainly due to stronger tax revenues.

• The extent to which the OBR deems the improvement in tax revenues to be structural is uncertain, and there’s a question mark over how it will adjust its estimates of the economy’s potential output growth in next month’s Budget. Therefore, better borrowing figures may not translate into more fiscal headroom for the Government. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The public finances were in surplus on the public sector net borrowing measure to the tune of £5.4bn in January. This was £7.1bn lower than a year earlier but £5bn higher than the OBR forecast. The year-on-year deterioration was largely a function of the cost of support programmes to help households and businesses pay their energy bills, although the steep fall in wholesale energy prices during January meant the cost last month was lower than expected. However, the main cause of the better performance relative to the OBR's forecast was the strength of tax revenues, which have held up impressively in the face of weak economic activity. Self-assessment income tax revenues were particularly strong in January, rising 33% year-on-year. Borrowing is expected to come in well below the OBR's full year forecast of £177bn.

“The EY ITEM Club thinks there's a good chance that the Government will abandon its plan to increase the energy price guarantee by £500 in April. Not only has the cost of subsiding bills declined, but wholesale energy prices have fallen so much that under current proposals average bills would rise £500 in April, only to fall by £700 or more in July.

“Whether there will be broader changes in the fiscal stance largely depends on whether the OBR deems stronger-than-expected tax revenues to be a structural or cyclical phenomenon. It’s been speculated that the OBR will downgrade its estimates of potential growth, although that jars with business investment and migration both being much stronger than the OBR expected, and the boost to the economy’s supply-side from less expensive energy. If the OBR does take a more downbeat view, any major change of direction in the Budget on 15 March is unlikely. In that case, the Budget would likely see the normal small-scale giveaways – including making the temporary fuel duty cut permanent – but more major policy changes are likely to be deferred until at least the autumn.”