- UK government borrowing continued to run below the Office for Budget Responsibility's (OBR) forecast in July due to stronger-than-expected revenues. However, given the significant increase in government borrowing costs in recent months, the medium-term outlook for borrowing still looks less healthy than the OBR expects.
- Based on current policy, the EY ITEM Club still thinks there's a good chance the OBR will deem the Government in breach of its fiscal rules when it presents new forecasts later this year. But, 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 £4.3bn in July, £3.4bn higher than a year ago but £2.6bn below the OBR's forecast. Higher year-on-year borrowing was a function of stronger expenditure, largely reflecting the impact of high inflation on debt interest payments. This more than offset a rise in tax receipts, which benefited from greater revenue from self-assessment income tax and corporation tax.
“July’s deficit left borrowing in the current fiscal year at £56.6bn, £11.3bn below the OBR's forecast. However, this margin is likely to fade over the rest of 2023-2024. For sure, the likelihood that GDP and inflation will be stronger than the OBR expects is positive for tax revenues. But the EY ITEM Club expects the spending overshoot to be larger still, reflecting not only the impact of higher inflation but also the effects of higher interest rates on debt interest payments.
“The period since the OBR’s last forecast has seen market expectations for interest rates rise markedly out to the end of the OBR's forecast horizon. Combined with the little leeway in meeting the fiscal rules forecast in the Spring Budget, this raises the odds that the official forecaster will deem the Government in breach of its fiscal rules based on current policy in the next fiscal event later this year. The Chancellor would likely respond by pencilling in further post-election spending cuts on top of fiscal plans that already look challenging. Therefore – regardless of who is in Number 11 after the public goes to the polls – the true medium-term path for fiscal policy is unlikely to emerge until the first post-election Budget.”