In just three years since modern records began in 1946, the government borrowed more than was necessary to balance the books in the last financial year. Even taking inflation into account, £139bn is a lot of money.
Unsurprisingly, that was the message from Jeremy Hunt after the release of the latest government finance data. Borrowing heavily had been the right thing to do in the face of two global shocks, the pandemic and the war in Ukraine, but it wasn’t something that could go on forever, he said.
Publicly, at least, the chancellor is willing to say that his priority is dealing with the UK’s national debt and that the last thing on his mind is whether he will have room to finance pre-election tax cuts.
But time is ticking and even if the government waits until the last possible moment, election day is only 20 months away. Hunt will inevitably look at the state of public finances to see what leeway he has.
In two important respects, things look brighter than when Hunt replaced Kwasi Kwarteng at Treasury six months ago. First, fears last fall that the economy was then in the early stages of a protracted recession proved unfounded. No one in government is getting carried away, but the fact that production is now off track instead of back is helpful for public finances.
There is no guarantee that the economy will continue to show its current resilience. The City expects the Bank of England to raise interest rates for the twelfth time in a row next month and there is a risk that the cumulative impact of higher borrowing costs and falling living standards will be too much to bear. But as it stands, growth will be slightly stronger in 2023 than the -0.2% the Office for Budget Responsibility expects.
The second piece of good news for Hunt is that borrowing for 2022-23 has been more than £13bn lower than the forecast OBR at March budget time. Again, a word of caution is in order. The £139bn deficit figure for the latest fiscal year is merely an estimate and will almost certainly be revised as hard data arrives in the coming months. It is not set in stone.
That said, Hunt already has more options than he thought when he presented the budget a little over a month ago, and that reach will increase if the economy continues to beat expectations in the coming months.
So what will the chancellor do with his extra leeway? The OBR said in its budget forecast that the chancellor was on track to meet his goal of reducing the national debt as a share of national output (GDP) in five years, so he might be prudent and bank his windfall.
Alternatively, with the Conservatives trailing Labor a considerable distance in the opinion polls, he could decide to use this year’s autumn declaration and next spring’s budget for some voter-friendly measures.
Sure, pre-election giveaways would mean lending declines less quickly than currently expected, but that’s something that can be put off until another day. If the Conservatives lose the election, it won’t be Hunt’s problem anyway.
Ruth Gregory of Capital Economics says she expects tax cuts before the election followed by a tightening of policy immediately afterward, whoever wins. That seems to be a pretty solid forecast. From a political perspective it is a no-brainer.