Today’s ONS government borrowing figures suggest that the public sector ran a surplus of £5.4 billion in January, this is much lower than the £12.5 billion surplus it ran in January 2022.
Back in November, the Office for Budget Responsibility (OBR) forecast an even smaller surplus of £0.4 billion for January 2023, so it is no surprise that the surplus was smaller than a year ago. The cost of energy support for both households and non-domestic energy users pushed up government spending on subsidies by £8.4 billion in January 2023, whereas these schemes did not exist in January 2022.
Two factors explain lower borrowing than forecast.
- The initial outturn for self-assessment tax receipts were £3.6 billion above forecast (and £5.5 billion higher than in January 2022) – although this initial outturn will be revised as more data become available.
- Interest rates on government borrowing, while much higher than a year ago, are lower than forecast in November. Debt interest spending in January was £6.7 billion. While this is the highest January figure since records began (and up from the £6.3 billion spent in January 2022) it is lower than the £9.0 billion forecast in November.
While expensive, the energy support schemes introduced in the last year are actually likely to cost less than forecast in November due to a combination of lower wholesale energy prices and a milder winter. This is welcome. But what matters more for next month’s Budget is the medium-term outlook for the public finances. Lower than feared spending on debt interest will be expected to persist. This will help the Chancellor, but he will need to find £6 billion a year to avoid an implausibly steep increase in fuel duty rates of 23% this April. Pressures on public services and the outlook for the economy - highly uncertain beyond the current slump, which may or may not meet the definition of a recession - will also contribute to making this a tricky first Budget for the Chancellor.
Isabel Stockton, Senior Research Economist at the Institute for Fiscal Studies said:
“Despite today’s figures suggesting a smaller January surplus than last year, borrowing was actually less than forecast in November. Good news for the Chancellor is that we can expect lower-than-expected spending on debt interest to persist, and the cost of the expensive energy support schemes also to end up lower than forecast. The latter will only represent a short-term saving for the Exchequer. As the OBR prepares a new set of forecasts for the upcoming March Budget, the judgement they make on the outlook for growth will be much more important than these changes. With public services under strain, pressures to cut taxes, and next to no wriggle room against the commitment to having debt falling as a share of national income in five years time the Chancellor’s first Budget will not be an easy one to navigate.”