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Today’s strong public finance figures are good news for the Chancellor, but a deteriorating economic outlook could still make for tricky fiscal arithmetic in the Spring Statement

This morning the ONS released the latest public finance numbers, which provide data on public sector receipts and spending through to the end of January 2019. These are the final set of monthly data due to be published before the Chancellor’s Spring Statement which is scheduled for Wednesday March 13.

Commenting on the numbers Thomas Pope, Research Economist at the IFS, said:

“In his October Budget last year, the Chancellor increased medium-term spending plans, funded by a substantial improvement in the fiscal forecasts. Strong growth in receipts last month, in particular  from income tax self-assessment and capital gains tax, suggest that borrowing will now, more-likely-than-not, be even lower this year than the £25.5 billion forecast then. A simple extrapolation of borrowing for the first ten months of the year suggests full-year borrowing of around £22 billion, which would be the smallest deficit the government has run since 2001–02.

But it may not be all good news for the Chancellor in next month’s Spring Statement. While a short-term boost to receipts would doubtless be welcomed, the Bank of England has downgraded the outlook for growth since October. If the government’s official forecasts follow suit that alone could add around £5 billion to the deficit in the medium-term. Even in spite of today’s good news, therefore, there could be tricky fiscal arithmetic for the Chancellor as he considers how best to respond to uncertainty around Brexit and how much money to make available to departments at this year’s spending review.”

Analysis:

January is always a big month for the public finances, as it is the month when most self-assessment income tax and capital gains tax receipts are recorded.

  • The public sector ran a £15 billion surplus in January as tax revenues came in more strongly than expected. Central government revenues overall were 10% higher than the same month last year, driven by self-assessment and capital gains tax receipts, which were 17% higher than last January.
  • At the time of the Budget in October, the Office for Budget Responsibility (OBR) improved its outlook for borrowing this financial year by £11 billion, forecasting a deficit of £26 billion whereas in last year’s Spring Statement it had forecast a deficit of £37 billion. The deficit in 2017–18 was £42 billion.
  • We now have data for the first ten months of the financial year, and a simple extrapolation would imply borrowing of around £22 billion, £3 billion lower than the OBR forecast in October, £15 billion lower than was forecast last March and £20 billion lower than was borrowed in 2017–18.
  • However, the outlook for the economy has deteriorated since October. Two weeks ago the Bank of England downgraded its forecast for growth in 2019 by ½ a percentage point, reducing the expected size of the economy this year by about £10 billion. If the OBR were to follow suit, a downgrade of this magnitude would add around £5 billion to the medium-term deficit.
  • As shown in analysis published last week, the provisional departmental spending totals set out in the October 2018 Budget, when combined with the commitment to increase spending on NHS England, imply cuts to the day-to-day budgets of other services over the next five years.

IFS researchers will provide a response to the Spring Statement the following day – details of this event can be found here.

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