Lower UK government borrowing raises prospects of tax cuts

Lower than expected government borrowing last month has increased the possibility of tax cuts in the Budget, analysts say.

Borrowing – the difference between spending and tax income – fell to £7.8bn in December, the Office for National Statistics (ONS) said.

Interest payments dropped sharply due to a rapid decline in inflation.

The amount was well below forecasts, and analysts said the figure could give leave “wiggle room” for tax cuts.

December’s borrowing figure was £8.4bn less than a year earlier, and the lowest figure for the month since 2019.

Interest payments on government debt fell to £4bn, down by £14.1bn from December 2022.

It was helped by the fall in inflation last year. The government’s interest payments are linked to the Retail Prices Index measure of inflation.

Ruth Gregory, deputy chief UK economist at Capital Economics, said the better-than-expected figures for December would give the chancellor “a bit more wiggle room for a big pre-election splash in the spring Budget on 6 March”.

Last week, Chancellor Jeremy Hunt hinted that he wanted to cut taxes.

Speaking at the World Economic Forum in Davos, he said that countries with lower taxes have more “dynamic, faster growing economies”.

The fall in the rate of inflation last year had increased expectations that the Bank of England will start to cut interest rates this year.

A reduction in interest rates could lead the government’s economic forecasting body, the Office for Budget Responsibility, to cut its forecasts for borrowing in future years.

Analysts say this would give the government more scope to cut taxes while still meeting its self-imposed spending and borrowing rules.

“Some high-profile tax cuts in the spring Budget appear likely,” said Martin Beck, chief economic adviser to the EY Item Club.

The ONS data showed that borrowing for the nine months to December 2023 was £119.1bn, which is £11.1bn more than in the same period the year before and the fourth-highest total on record.

Total debt – which is the overall amount of money owed by the government that has built up over years – was £2.67 trillion at the end of December.

That is the equivalent of 97.7% of the size of the UK’s economy as measured by gross domestic product (GDP), remaining at levels last seen in the early 1960s, the ONS said.

Government borrowing has increased sharply in recent years. The government spent billions on measures to support the economy during the Covid pandemic, and then also subsidised energy bills when costs surged after Russia’s invasion of Ukraine.

Chief Secretary to the Treasury Laura Trott said: “Protecting millions of lives and livelihoods during Putin’s energy shock and a once in a century pandemic has created economic challenges.

“However, it is right that we pay back these debts so future generations are not left to pick up the tab.”