Government borrowing undershoots OBR forecast again – EY ITEM Club comments

• Government borrowing of £11.6bn in August was below the Office for Budget Responsibility’s (OBR) forecast for the fifth successive month. But higher interest rates and probable growth downgrades in the OBR’s next economic forecast mean the Chancellor still faces significant challenges in meeting his medium-term fiscal rules, limiting room for any ‘giveaways’ in November’s Autumn Statement.
• Granted, the effect of high inflation on fiscal drag means the Treasury has raised far more from the freezing of income tax thresholds than it expected, suggesting a case for tax cuts. But with the Bank of England judging that the economy is operating at full capacity, any serious fiscal loosening would risk monetary policy being tightened further, or interest rates staying higher for longer.  

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Public sector borrowing of £11.6bn in August was high in absolute terms – it was the fourth highest for any August on record – and £3.5bn up on a year earlier. But it was below the OBR’s forecast of £13bn. This was the fifth successive monthly undershoot of the OBR’s projections, and meant total borrowing in the fiscal year to date of £69.6bn is now £11.4bn less than the £81bn forecast by the OBR. Tax receipts in August continued to rise more strongly than the OBR had projected. Meanwhile, although government spending was also above expectations, the overshoot here was marginal.

“However, the EY ITEM Club doesn’t think that the recent outperformance of the public finances gives the Chancellor much more room for manoeuvre in the Autumn Statement on 22 November. For sure, the effect of high inflation on fiscal drag means the Treasury has raised far more from the freezing of income tax thresholds than it expected, presenting at least one case for tax cuts.

“But the fiscal rules around government borrowing and debt relate to a period five years out, so short-term developments in the fiscal numbers aren’t of much relevance. And what was already a narrow margin of safety in meeting those rules will be squeezed by interest rates – which will make the cost of government borrowing higher than the OBR expected – and likely downgrades by the OBR to its GDP growth forecast. Moreover, with the Bank of England judging that the economy is operating at full capacity, any serious fiscal loosening risks monetary policy being tightened further, or interest rates staying higher for longer.

“This still leaves the Chancellor the option of shuffling tax and spending around, while keeping the overall fiscal stance unchanged. With the next general election due by the start of 2025, the Government may well be hoping that the economic and fiscal backdrop to next spring’s Budget proves more amenable to delivering fiscal ‘giveaways’”.