The UK government’s plans for tax cuts ahead of the next general election have been called into question after it was revealed that borrowing in the past year was higher than expected. According to provisional estimates from the Office for National Statistics (ONS), the Treasury borrowed £120.7bn in the financial year ending March 2024, a decrease of £7.6bn from the previous year. However, this figure is still £6.6bn more than what was forecasted by the Office for Budget Responsibility (OBR) just a month ago.
The ONS also reported that government debt was equivalent to 98.3% of the UK’s annual gross domestic product (GDP) in March, a 2.6 percentage point increase from the previous year and the highest level seen since the early 1960s. This has raised concerns about the government’s ability to deliver on tax cuts, as stated by Ruth Gregory, an economist from Capital Economics. She stated, “If the chancellor was hoping for more fiscal room for tax cuts at a later date, he will be disappointed. Based on the larger-than-expected budget deficit and recent rise in market interest rates, there may only be around £5bn of fiscal ‘headroom’ for tax cuts, compared to the previously estimated £8.9bn in March.”
Rob Wood, an economist from Pantheon Macroeconomics, also expressed doubts about the government’s ability to cut taxes, stating that it could potentially create financial challenges for the Treasury after the upcoming election, expected to take place in the autumn. He explained, “The next government will face a difficult decision between raising taxes to address public service needs or maintaining the recent tax cuts implemented by the chancellor.”
Despite these concerns, Chancellor Jeremy Hunt has previously expressed his intentions to continue reducing taxes. In the latest budget, he reduced national insurance by 2p and has indicated a desire to further decrease taxes. In recent business news, the FTSE 100 reached a new record high, while Thames Water warned of potential bill increases and the CEO of Iceland collapsed during the London Marathon.
According to Jessica Barnaby, the ONS’s deputy director for public sector finances, the increase in government spending was primarily due to increased spending on public services and benefits, which surpassed the significant reductions in interest payments and energy support scheme costs. However, with an increase of £66bn in public sector income, overall, the deficit still decreased. Additionally, central government wages, including those in the health and education sectors, saw an increase of £21bn, while inflation-linked debt decreased by 27% to £78.3bn. The ONS also reported a record high of £7.5bn in inheritance tax receipts.
A spokesperson for the Treasury responded to the concerns, stating, “In recent years, debt has increased as a result of our efforts to protect jobs during the COVID pandemic and provide support for energy bills following the surge in prices caused by Vladimir Putin’s invasion of Ukraine.” They emphasized the importance of sticking to the plan to reduce debt and highlighted the government’s success in decreasing national insurance by a third. They further stated, “This demonstrates our determination to end the double taxation of work.”
