The government’s borrowing bill was lower than expected last month as falling inflation and bumper tax revenues helped improve public finances.
Figures from the Office for National Statistics showed that monthly public sector borrowing in August was £11.6 billion, below the £13 billion forecast by the government’s fiscal watchdog and just above the £11.1 billion expected by polled economists.
The figures are the latest undershoot in borrowing for the government. It has benefited from a rising tax take and falling inflation, which has reduced the Treasury’s bill for servicing debt.
Total borrowing is now £69.6 billion for the financial year that started in April, £11.4 billion lower than the Office for Budget Responsibility forecast in March.
The statistics office said the government was collecting more VAT and income tax, helping increase monthly tax receipts to £57.6 billion, up nearly £3 billion on August last year. High inflation has boosted public finances by dragging workers into higher tax brackets.
Recent falls in monthly inflation, as measured by the retail prices index, have helped cut the government’s debt interest bill on inflation-linked gilts by £3.1 billion, compared with August last year. Total debt servicing costs last month were £5.6 billion, undershooting the £7.9 billion projected by the OBR.
The figures are a boost for Jeremy Hunt, the chancellor, before his autumn statement in November. Treasury officials hope that an improvement in public finances will give the government room to announce a tax cut in the spring budget, before the general election next year.
The chancellor said: “These numbers show why, after helping families in the pandemic, we now need to balance the books. That becomes much easier when inflation is under control.”
The statistics office said the debt ratio, which measures government debt as a proportion of the economy, rose slightly to 98.8 per cent and is at its highest level since the 1960s.
Martin Beck, chief economic adviser to the EY Item Club forecaster, said that despite having extra billions in fiscal headroom, the chancellor was unlikely to spend his windfalls this autumn. “The fiscal rules around government borrowing and debt relate to a period five years out, so short-term developments in the fiscal numbers aren’t of much relevance,” Beck said.
Cara Pacitti, senior economist at the Resolution Foundation, said that despite the boost to tax revenues, high inflation also meant public spending was being squeezed in real terms, as the government’s departmental budgets were set before the inflationary surge.
“The chancellor may choose to bank the good borrowing news from higher inflation and ignore the public services pain it is causing in his upcoming autumn statement, but that challenge will need to be confronted by whoever wins the next election,” Pacitti said.