UK Smashes January Budget Surplus Record, Brace for 'Tax Sandwich' Crisis! (2024)

Jeremy Hunt will probably only have “limited headroom” in next month’s budget, despite the record surplus racked up in January, predicts Ruth Gregory, deputy chief UK economist at Capital Economics.

Gregory estimates Hunt will only have £15bn to play with, which won’t be enough for a “big pre-election splash”, despite January’s record surplus reported this morning.

She tells clients this morning:

We think that probable downgrades to the OBR’s GDP and inflation projections will mean the Chancellor has just £15bn (0.5% of GDP) to play with whilst still meeting his fiscal rules.

We suspect he will unveil a smaller net giveaway than November’s £21bn of about £10bn (0.4% of GDP) and that he will have to resort to a further squeeze on public spending to meet his fiscal rules.

But resolving the problem of how to deliver such tight spending plans will be a problem left for after the election.

There were reports last week that Hunt was considering billions of pounds of new spending cuts to fund pre-election tax cuts.

That would be on top of the “implausible austerity” already penciled in for after the election under Hunt’s plans.

Polling last weekend, though, suggested such deep cuts could be counter-productive for the Conservatives, given public concerns over under-funded public services.

Jeremy Hunt could have £21bn of headroom for tax cuts (or, say, spending rises) in March’s budget, estimates Michal Stelmach, senior economist at KPMG UK.

Around a third of that flexibility could be used to freeze fuel duty again, Stelmach explains:

“The latest set of data suggests that borrowing could end 2023-24 at £114 billion. We expect the OBR to upgrade its fiscal outlook on the back of a weaker expected path for interest rates, lower spending on inflation-linked debt, as well as a possible upward revision to their net migration assumptions, which are net positive for the public finances. This could increase the headroom to meet the fiscal mandate to £21 billion, up from £13 billion at the Autumn Statement.

“The policy choice lies between fiscal pragmatism and a stated desire to cut taxes. Accounting for the customary fuel duty freeze could leave the Chancellor with around £14 billion to play with.

This would be enough to afford a 2p cut to the basic rate of Income Tax, also benefitting the pensioners who could not take advantage of the recent reduction in the National Insurance contributions. However, it would inevitably come at a cost of a greater constrain on future policy options. Navigating this delicate balance will be a tricky task in an election year.”

Here’s ONS deputy director for public sector Jessica Barnaby on this morning’s public finances:

“January’s surplus is the largest in nominal terms since monthly records began in 1993, although borrowing in the year to January is only slightly lower than the same period last year.

Tax receipts are always higher in January than other months owing to self-assessed taxes, which often leads to a surplus.

See Also

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Also, with recent reductions in the RPI rate, interest payable on government gilts and without last year’s energy support schemes, overall expenditure was down on this time last year, despite increased spending on public services and benefits.

“As a proportion of gross domestic product, public sector debt is up on the year, and remains at levels last seen in the 1960s.”

The broader picture is that the UK’s national debt, as a share of the economy, is still the highest since the early 1960s.

The public sector net debt was clocked at £2.646bn at the end of January 2024, or around 96.5% of UK GDP – 1.8 percentage points higher than a year ago.

As this chart shows, the national debt jumped after the financial crisis of 2008, and again after the Covid-19 pandemic.

So far this financial year (since April), the UK has borrowed £3.1bn less than in the same ten months last year.

The ONS says it has revised down its previous estimate of borrowing this year by £5.8bn.

In January, the interest payable on central government debt was £4.4bn, £3.5bn less than in January 2023.

This was the lowest January interest payable since 2021 and £2.7bn less than the £7.1bn forecast by the Office for Budget Responsibility, the ONS says.

This chart shows how the interest bill on the national debt soared in the last couple of years, as inflation surged into double-digit levels – driving up the debt repayment cost on index-linked gilts.

Lindsay James, investment strategist at Quilter Investors, says:

“Since November, RPI has fallen from 5.3% to 4.9% on a 12-month basis. Index-linked gilts, which account for around a quarter of government debt issuance, have interest payments linked to RPI, as opposed to CPI.

This has seen interest payable on index-linked gilts decline significantly since January 2023, but it is a small increase on last month’s interest bill.

Good morning, and welcome to our rolling coverage of business, the financial markets and the economy.

The UK has posted its largest budget surplus for a January in at least 30 years, giving a final healthcheck on the public finances ahead of next month’s budget.

There was a surplus of £16.7bn last month, new data from the Office for National Statistics shows – which is the largest surplus since monthly records began in 1993, and twice as large a surplus as a year ago.

January is typically a good month for the public finances, as it includes the deadline for self-assessment taxpayers to pay what they owe.

The ONS explains:

Each January tax receipts are always higher than in other months, owing to receipts from self-assessed taxes; combined self-assessed income and capital gains tax receipts were £33.0 billion, £1.8 billion less than a year earlier.

City economists had expected an even larger surplus, though, of £18.7bn.

Central government tax receipts rose by £3.9bn year-on-year, to £111.4bn in January, lifted by a rise in takings from corporation tax, income tax and Value Added Tax (VAT).

Self-assessed (SA) tax receipts were a little lower than last January – although some of this money may show up in February’s public finances.

On the other side of the national balance sheet, net social benefits rose by £3.4bn in January to £23.7bn.

The ONS explains:

In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost-of-living payments.

Ending the energy support schemes which provided subsidies to consumers and businesses also cut the government’s spending bill.

Encouragingly, the interest payment on the national debt also fell, due to the drop in inflation over last year (used to set the repayment on index-linked bonds).

Today’s data also shows that the UK has run up a deficit of £96.6bn so far this financial year.

That’s £9.2bn less than forecast by the Office for Budget Responsibility (OBR), which may give chancellor Jeremy Hunt some wriggle room for tax cuts in the Budget.

But, the Resolution Foundation is warning this morning that any tax giveaways next month will be squeezed in between £20bn of tax increases already implemented and a further £17bn of hikes pencilled in for after polling day.

Calling this a “tax sandwich”, Resolution lay out what lies ahead for taxpayers:

Tax rises of around £20 billion were introduced in 2023-24, including freezing personal tax thresholds and increasing Corporation Tax.

Highly unusually, the government has also pre-announced major tax rises for after the next election, with a further £17 billion of tax rises set to come into effect in the next parliament, including a Spring 2025 Stamp Duty rise and three extra years of tax threshold freezes.

History, and significant spending cuts pencilled in for after the election, tell us that further tax rises may well be announced after polling day – as we saw in 1993, 1998, 2011, 2016 and 2020.

Also coming up today

Financial markets are bracing for two important events this evening (UK time). The US central bank will release the minutes of its last monetary policy meeting, where it left interest rates at a 23-year high; they’ll be strutinised for hints as to when cuts may come.

And after Wall Street closes, chip giant Nvidia will release its latest financial results. Given Nvidia’s share pruce has more than tripled in the last year, lifted by AI enthusiasm, the stakes are high.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says Nvidia’s numbers will be the “most expected earnings of the quarter today”, adding:

Nvidia is expected to announce a sales revenue of around $20bn in the Q4 and earnings per share of $4.60. The numbers are huge if you think that sales were worth around $6 billion, and EPS was just 88 cents a year ago.

We are talking about a more than 200% sales growth – which, no matter if the company meets expectations or not – is HUGE. But of course, the price action was big too. Nvidia is up by more than 400% since the beginning of 2023. This is why any correction could be massive.

The agenda

• 7am GMT: UK public finances for January

• 11am GMT: CBI industrial trends survey of UK manufacturing

• 2pm GMT: Bank of England policymaker Swati Dhingra gives a speech on ‘Recent BoE projections – key factors/judgements’

• 2.15pm GMT: Treasury Committee to question forecasters about economic modelling ahead of Spring budget

• 3pm GMT: Eurozone consumer confidence report for February

• 7pm GMT: Federal Reserve releases minutes of its latest FOMC meeting