- Government borrowing continued to run above the Office for Budget Responsibility's (OBR) forecast in May due to stronger-than-expected spending. The EY ITEM Club expects the gap to widen to around £20bn by the end of the fiscal year, given the recent marked increase in market interest rate expectations.
- Unless that increase reverses in the next few months, the rise in market interest rates will likely mean the OBR deems the Government is in breach of its fiscal rules. The Chancellor's possible response would be to add more post-election austerity, meaning the true medium-term path for fiscal policy is unlikely to emerge until the first post-election Budget
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Public sector net borrowing (excluding public sector banks) came in at £20bn in May, £10.7bn higher than a year ago and £1.7bn above the OBR's forecast. Higher borrowing was largely a function of stronger-than-expected growth in spending, reflecting the cost of energy support schemes, the impact of high inflation on debt interest payments, and increasing staff costs following the recent NHS pay settlement.
“We only have two months' worth of figures for fiscal year 2023-2024, and public finances data is highly prone to revision. Despite April's deficit being revised down, borrowing in the current fiscal year is running £2.1bn above the OBR's forecast. The EY ITEM Club expects this gap to widen as we move through 2023-24. The likelihood that GDP and inflation will be stronger than the OBR expects is positive for tax revenues. However, this will be more than offset by the upward pressures on spending. Higher inflation combined with higher short and long-term interest rates will significantly increase the level of debt interest payments, and the EY ITEM Club thinks that borrowing could overshoot the OBR's forecast by as much as £20bn by the end of the fiscal year.
“The market curve has risen markedly out to the end of the OBR's forecast horizon, so at the next fiscal event in the autumn, the official forecaster will likely deem the Government in breach of its fiscal rules based on current policy. The Chancellor would likely respond by adding more post-election spending cuts on top of a spending squeeze that already looks challenging. So the true medium-term path for fiscal policy is unlikely to emerge until the first Budget after the election.”