Press release

21 Jul 2023 London, GB

Large revisions show the public finances in a healthier position – EY ITEM Club comments

Substantial historical revisions and a downside surprise for borrowing in June have left the public finances looking in a healthier position than previously thought. However, higher interest rates mean borrowing is still likely to be higher than the Office for Budget Responsibility (OBR) expects in the rest of the fiscal year.

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James White
James White

Senior Executive, Media Relations, Ernst & Young LLP

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  • Substantial historical revisions and a downside surprise for borrowing in June have left the public finances looking in a healthier position than previously thought. However, higher interest rates mean borrowing is still likely to be higher than the Office for Budget Responsibility (OBR) expects in the rest of the fiscal year.
  • So, the EY ITEM Club thinks there’s still a good chance that, without remedial action, the OBR will deem the Government in breach of its fiscal rules at the next fiscal event in the autumn – though the true medium-term path for fiscal policy appears 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 £18.5bn in June, £0.4bn lower than a year ago and £2.7bn below the OBR's forecast. The ONS also cut its estimate of borrowing in April and May by £7bn, so the public finances look much healthier than in last month's release, with borrowing running £7.5bn below the OBR's forecast over the fiscal year to date. The main reason for the outperformance is the strength of tax receipts, which has more than offset the impact of higher spending.

“The scale of today's historical revisions demonstrates the challenges associated with forecasting the public finances. But the EY ITEM Club thinks borrowing is likely to be higher than the OBR anticipates over the rest of the fiscal year. The likelihood that GDP and inflation will be stronger than the OBR expects is positive for tax revenues. But this will probably be more than offset by upward pressures on spending. Higher inflation combined with higher short and long-term interest rates will significantly increase the level of debt interest payments.

“So, at the next fiscal event in the autumn, there is still a good chance that the official forecaster will deem the Government in breach of its fiscal rules based on current policy. With an election on the horizon, any additional fiscal tightening will likely be pencilled in for after the country heads to the polls. As such, the true medium-term path for fiscal policy is unlikely to emerge until the first Budget after the election.”