A glimmer of hope for public finances but don't expect giveaway spring budget

At first blush, the general public sector internet borrowing figures for December are fairly miserable.

At £27.4bn, the general determine will not be solely greater than double the revised £10.4bn seen in December 2021, it was additionally appreciably greater than the £17.7bn that the City had been anticipating.

It is the highest December borrowing because the knowledge started being ready on this approach 29 years in the past.

The December quantity was additionally £9.8bn greater than the Office for Budget Responsibility (OBR) forecast solely as not too long ago as November final 12 months – though that was due largely to modifications in pupil mortgage valuations.

For the broader image, although, you should not have to look too far to seek out out why borrowing stays so excessive.

Interest funds on the nationwide debt in the course of the month got here in at £17.3bn, the second highest on document, reflecting the truth that curiosity funds on round 1 / 4 of the nationwide debt (28% to be exact) are linked to the speed of inflation.

When inflation goes up, so do curiosity funds.

The Office for National Statistics (ONS) famous that, of that £17.3bn, some £13.7bn mirrored the impression of inflation on index-linked items.

It underlines why the federal government’s major financial focus stays bringing down inflation and why it’s taking such a tough line on public sector pay awards.

The different large component of spending, costing practically £7bn in the course of the month, mirrored the extraordinary sums being thrown by the federal government at supporting households and companies with their vitality payments.

All that meant authorities spending in the course of the month exceeded what the federal government raked in.

The latter determine got here in at £74.6bn in the course of the month, up £3.9bn on December 2021, most of which – some £3.4bn – was within the type of additional taxes.

These, in some circumstances, have been rising fairly properly from the federal government’s viewpoint.

VAT receipts for the month have been up 4.9% on December 2021, which might effectively replicate the truth that inflation is pushing greater absolutely the sums being spent by customers, whereas company tax receipts have been up 11.5% and revenue tax receipts collected through PAYE have been up 9.7%.

The latter is partly testomony to among the large pay will increase being seen now, notably within the non-public sector, a few of which have even been exceeding the speed of inflation in some classes. These are more likely to proceed to rise because the 12 months goes on due to the choice by Jeremy Hunt, the chancellor, to not increase revenue tax thresholds in step with inflation – ‘fiscal drag’ as it’s recognized within the jargon.

Those frozen thresholds additionally apply to different taxes. For instance, the federal government is raking in ever-larger sums from Inheritance Tax, the ‘nil band’ threshold for which has stayed the identical since 2010-11 and which, like the primary residence nil fee, has been frozen till 2026.

Figures printed individually by HM Revenue & Customs introduced in £5.3bn in inheritance tax from April to December final 12 months – up £700m on the identical interval in 2021. That largely displays greater home costs and means a number of households who won’t essentially think about themselves to be well-off at the moment are being stung by this unpopular levy.

As Alex Davies, chief government of the funding dealer Wealth Club, noticed: “Contrary to popular belief, inheritance tax doesn’t just affect the super-rich, many who would not consider themselves wealthy at all will also bear a considerable burden.

“Rampant inflation and years of frozen allowances and hovering home costs imply many extra households will discover themselves hit with a hefty inheritance tax invoice which they may not have envisaged or deliberate for.”

The larger image is that borrowing to date this monetary 12 months stands at £128.1bn, up £5.1bn on the identical interval final 12 months, albeit £2.7bn lower than the OBR was anticipating at this stage.

But there’s a slight glimmer of hope.

It is that the 2 large ticket areas which have brought on public spending to so outweigh public borrowing are set to average.

Inflation appears to be like to have peaked in October final 12 months and is now set to fall steadily.

The economics workforce at Barclays, for instance, forecast that the headline fee of Consumer Prices Inflation can have fallen to six.3% by July this 12 months and, by December this 12 months, will probably be down to three.9%.

That decline in inflation will convey down sharply the inflation-linked component of curiosity funds on the nationwide debt.

The different large component, the help to households and companies with their vitality payments, can be set to fall sharply as, firstly the federal government withdraws help and secondly, wholesale vitality costs come down.

As Victoria Clarke, UK Chief Economist at Santander CIB, put it: “The miss against OBR forecasts is not likely to be repeated over the months ahead and so borrowing still appears on track to come in a touch below the £177bn… set out in the November autumn statement.

“Furthermore, there may be nonetheless extra wiggle room within the money numbers. Further forward, the federal government is more likely to face decrease than predicted fiscal prices for family vitality help, after falls in wholesale gasoline costs.”

Yet that wiggle room is more likely to be restricted.

There will nonetheless be calls for from enterprise for help with vitality payments whereas, as was reported within the Sunday press, Mr Hunt is inclined to maintain in place the short-term 5p-a-litre reduce in gasoline obligation, launched in March final 12 months, for an extra 12 months. That is a massively costly giveaway that will price the Treasury £6bn.

Moreover, it feels virtually inevitable that ministers are going to have to offer floor to some public sector pay calls for, notably within the NHS. That will even restrict Mr Hunt’s room for manoeuvre.

For that motive, regardless that Mr Hunt is coming below strain from his backbench MPs to chop taxes in his forthcoming finances, it might be unwise to anticipate any large giveaways in March.