Report Shows Government Borrowing in February Exceeded Expectations
Government borrowing in February has surpassed expectations, with the UK government having to borrow £8.4 billion, higher than the predicted £6 billion. The increase in borrowing can be attributed to higher social benefits and cost-of-living payments, as central government spending rose. This news suggests that the government may exceed the independent Office for Budget Responsibility’s (OBR) borrowing forecasts for this fiscal year.
According to Ruth Gregory, Deputy Chief UK Economist at Capital Economics, for the OBR’s full-year forecast of £114 billion to be met, borrowing in March would have to be as low as £7.2 billion. However, this seems unlikely given that borrowing in March last year stood at £16.9 billion. Despite this, Gregory still expects borrowing to decrease at a faster rate than predicted by the OBR beyond 2025/26.
Although February’s borrowing was higher than anticipated, it was still £3.4 billion lower than in January 2023. The Office for National Statistics (ONS) highlighted that this was the fourth consecutive month in which borrowing was lower than the same month a year ago. This positive trend has been driven by growth in tax receipts surpassing growth in spending.
The ONS revealed that central government tax receipts reached £86.4 billion by the end of February, a £7.2 billion increase compared to the previous year. The rise in revenue can be attributed to increased tax payments from businesses and individuals. Income tax contributed £3.5 billion to the increase, followed by corporation tax with £1.9 billion, and VAT with £600 million. Compulsory social contributions, mainly from national insurance, also contributed to the rise by £400 million.
On the spending side, central government spending in February reached £89.6 billion, marking a £2.9 billion increase from the same period last year. This increase is primarily due to a rise in social benefits, which reached £25 billion, and cost-of-living payments amounting to around £2 billion. Inflation-linked benefits uprating played a significant role in the increase in social benefits.
In response to the statistics, Laura Trott, Chief Secretary to the Treasury, acknowledged the government’s support during the COVID-19 pandemic and the energy bill subsidies following Russia’s invasion of Ukraine. Trott emphasized the need to ensure that future generations are not burdened with excessive debt.
In addition to the report on government borrowing, the Bank of England (BoE) announced that it would keep interest rates unchanged. Bank Governor Andrew Bailey stated that recent signs indicate inflation is decreasing, but further progress is necessary before considering a rate cut. Bailey highlighted the need for services inflation, which currently stands at 6 percent, to decrease further. Although inflation remains above the BoE’s target of 2 percent, Chancellor of the Exchequer Jeremy Hunt expressed confidence that the target would be achieved within months.
The easing of food inflation has been a significant driver in bringing down overall inflation, according to Grant Fitzner, Chief Economist at the ONS. This, coupled with slower price rises in restaurants and cafes, has contributed to lower inflation. Jeremy Hunt welcomed the decrease in food inflation and emphasized the positive economic conditions it sets, which could allow for further progress in reducing national insurance contributions.
In his final budget before the general election, Hunt confirmed a reduction of 2 pence in the pound for national insurance contributions. This move is expected to save the average person £450 annually and supports the government’s goal of boosting economic growth and making work more financially rewarding.
Overall, while government borrowing in February exceeded expectations, there are positive signs such as decreased borrowing compared to the previous month and consecutive months of lower borrowing year-on-year. The increase in tax receipts and efforts to combat inflation provide hope for the UK economy’s recovery. However, it remains to be seen whether the government will meet the OBR’s borrowing forecasts and if inflation will continue to decrease in line with the BoE’s target.
