On Tuesday, the UK government received some unexpected good news in the form of a £5.4bn budget surplus in January. Receipts were boosted by the highest level of self-assessment income tax collected since records began in 1999, and costs were lower with the government’s energy bill support scheme being significantly less expensive than previously forecast.
Overall, this has resulted in public borrowing being £30.6bn less in the financial year to date than predicted by the Office for Budget Responsibility.
The Spring budget is now less than 3 weeks away. The optimistic news about the UK’s balance sheet could provide Chancellor, Jeremy Hunt, with the license to be more creative in his economy-boosting solutions.
With the Bank of England (BoE) still tightening monetary policy it is important, however, that any policy announcements are not inflationary in the short run. They need to give the impression of a united front, rather than trying to pull in opposite directions, which would likely result in the BoE hiking interest rates even further to compensate.
There may be some giveaways in the form of an extension of the fuel duty cut or to scrap the previously announced rise in April of the energy price guarantee. Those hoping for more, though, could be left disappointed, with the chancellor likely to wait until next year before firing up some pre-election policies aimed at winning back public opinion. With inflation trending lower and predicted to fall through this year (Citigroup now forecasting UK inflation at 2.3% in November), the BoE would certainly prefer Mr Hunt keeps most of his rabbits in the hat for a while longer.
John Naylor, Chartered FCSI – Head of Investment Committee