UK budget deficit shows limited room for election giveaways

London: The budget picture for British Prime Minister Rishi Sunak has deteriorated, official data showed on Thursday, but a smaller debt interest bill thanks to slowing inflation could yet restore some of his limited room for pre-election tax cuts.

Public sector net borrowing, excluding state-owned banks, totalled 116.4 billion pounds ($147 billion) in the financial year so far, 24.4 billion pounds higher than in the April-November period a year earlier, the Office for National Statistics said.

In November alone, the deficit of 14.3 billion pounds was bigger than expected – a poll of economists had pointed to a shortfall of 12.9 billion pounds.

Britain’s statistics office revised up borrowing for each of the previous seven months by 3.7 billion pounds in total.

British borrowing has surged in recent years, first as the government supported the economy during the COVID pandemic and then as it provided massive aid to households and businesses to offset the surge in energy prices in 2022.

Thursday’s figures served as a reminder of the fragility of the so-called fiscal headroom which Sunak hopes will allow for more tax cuts ahead of elections expected next year.

Opinion polls show his Conservative Party lagging far behind the opposition Labour Party.

Headroom refers to the margin by which Britain’s finance minister Jeremy Hunt can expand fiscal policy – through tax cuts or spending increases – before running into rules that are designed to keep borrowing and debt in check.

Britain’s budget watchdog, the Office for Budget Responsibility, estimated that headroom at 13 billion pounds in November when Hunt gave tax cuts to workers and businesses and tightened a squeeze on already stretched public services in the years ahead in order to pay for them.

But cooling inflation – which dropped last month to the lowest annual rate since September 2021 at 3.9% – is likely to increase the amount of headroom for Hunt by lowering Britain’s debt interest bill in the coming months.

Samuel Tombs, an economist with Pantheon Macroeconomics, said Hunt might see his room for manoeuvre to cut taxes or raise spending almost double to about 25 billion pounds by the time of his annual budget statement due in early 2024.

“Nonetheless, we think that the Chancellor will be relatively restrained with pre-election bribes,” Tombs said, noting how bond prices fell shortly after the announcement of his tax cuts in November.

The government’s interest rate bill, while still high by historical standards, fell by 15% to 61 billion pounds in the April-November period as price growth slowed, easing the hit to the government from its inflation-linked bonds.

Thursday’s data also showed how inflation and rising wages had boosted receipts from income tax, corporation tax and value added tax by 8-10% in the April-November period compared with a year earlier.

There was a 12% increase to 195 billion pounds in spending on items such as benefits and pensions in the financial year to date, reflecting a big inflation-adjusted increase in welfare.

Public sector net debt, excluding state owned banks, stood at 2.67 trillion pounds, equivalent to 97.5% of economic output.