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UK budget deficit shows limited room for election giveaways

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UK budget deficit shows limited room for election giveaways By Reuters

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Published Dec 21, 2023 07:07
Updated Dec 21, 2023 08:11

© Reuters. FILE PHOTO: People shop on Oxford Street in London, Britain April 10, 2023. REUTERS/Anna Gordon/File Photo/

By Andy Bruce and William Schomberg

LONDON (Reuters) -Britain ran up a higher-than-expected budget deficit in November and borrowing in previous months was revised higher too, underscoring the limited room for pre-election tax cuts by Prime Minister Rishi Sunak’s government.

Public sector net borrowing, excluding state-owned banks, totalled 14.3 billion pounds ($18.1 billion) in November, official data showed on Thursday. A Reuters poll of economists had pointed to 12.9 billion pounds.

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

Borrowing in the first eight months of the financial year totalled 116.4 billion pounds, 24.4 billion pounds higher than in the April-November period a year earlier, the Office for National Statistics said.

The 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.

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.

In November, the Office for Budget Responsibility put that headroom at 13 billion pounds as Hunt gave tax cuts to workers and businesses but tightened a squeeze on already stretched public services in the years ahead to pay for them.

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.

Thursday’s data showed the impact of high inflation and rising wages on the public finances with receipts from income tax, corporation tax and value added tax up 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.

A recent sharp fall in borrowing costs in financial markets, as investors price in interest rate cuts by central banks, may ease some of the pressure on the public finances in the coming months and offer Hunt and Sunak a bit of leeway for tax cuts.

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

British borrowing 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.

Public sector net debt, excluding state owned banks, stood at 2.67 trillion pounds, equivalent to 97.5% of economic output, the Office for National Statistics said.

($1 = 0.7914 pounds)

UK budget deficit shows limited room for election giveaways

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