Jeremy Hunt’s pre-election tax cut proposals have hit a snag as government borrowing surged above £20 billion last month due to increased spending on benefits and lower tax revenues.
According to the Office for National Statistics (ONS), the budget deficit widened by £1.5 billion compared to the previous year. This marked the fourth-highest April deficit on record.
Hunt had hoped for an upturn in public finances to support tax reductions ahead of elections.
However, the latest data revealed a bleaker fiscal situation than anticipated during the March budget forecasts.
The Office for Budget Responsibility (OBR) reported that April’s deficit exceeded expectations by £1.2 billion, attributed to increased government spending, rising benefits, and diminished tax revenues.
Jeremy Hunt’s recent reduction in national insurance contributions (NICs), implemented in April 2024, coincided with this financial shortfall. Additionally, the OBR revised its forecast for the 2023-2024 deficit, now projecting it to be £0.8 billion higher than previously estimated.
The ONS chief economist, Grant Fitzner, stated, “While central government spending and income overall both rose on this time last year, a large drop in NICs meant receipts did not grow as fast as spending.”
“Here, falls in expenditure on energy support were offset by increases in benefit spending from the annual uprating.”
Grant Fitzner
In April, national debt as a percentage of the country’s income reached 97.9%, its highest level since the early 1960s, marking a 2.5 percentage point increase over the past year.
Financial analysts observed that this latest data on public finances has tightened the room for Jeremy Hunt to implement tax cuts.
His self-imposed guideline, stipulating that national debt should decline relative to income within five years, faces further challenges in light of these figures.
“The headroom to cut taxes doesn’t exist, but Chancellor Hunt seems likely to go ahead anyway in a pre-election autumn statement, probably in September.
“Spending demands overshooting forecasts is likely to be an ongoing theme for the public finances, with Hunt planning implausibly weak expenditure to generate his tax-cutting room.”
Rob Wood, chief UK economist at Pantheon Macro
Peter Arnold, EY UK’s chief economist, projected that April’s financial underperformance would persist throughout the remainder of the 2024-2025 fiscal year.
He anticipates that yields on government bonds and official interest rates will surpass the levels assumed in the OBR’s March forecast, resulting in increased debt servicing expenses beyond what was initially expected.
“Some of this impact looks likely to endure to the end of the OBR’s five-year forecast horizon, cutting the already-slim headroom against the government’s main fiscal rule.”
Peter Arnold
IMF Warns Jeremy Hunt
The International Monetary Fund (IMF) issued a cautionary note to Jeremy Hunt on Tuesday, May 21 advising against implementing pre-election tax cuts.
The IMF highlighted a looming £30 billion gap in public finances, urging careful consideration of fiscal policies amidst the current economic climate.
Rishi Sunak’s spokesperson rebutted the IMF’s stance, asserting that the government disagreed with the notion that there was no space for a third tax cut within a year.
“I think that we respectfully disagree with the IMF,” the spokesperson said.
Contrary to the IMF’s suggestion of tax hikes or spending reductions, the Treasury remains focused on pursuing its existing fiscal agenda.
“My view is that cutting national insurance, rewarding work, is an important part of growing the economy.
“We rightly protected millions of jobs during Covid and paid half of people’s energy bills after Putin’s invasion of Ukraine sent bills skyrocketing – but it wouldn’t be fair to leave future generations to pick up the tab. That’s why we must stick to the plan to get debt falling.”
Treasury spokesperson
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