Little wonder that January is normally a very good month for Her Majesty’s Treasury. There is a stonking surplus for the month, in contrast to baleful deficits in other months of the year, as those cheques are swiftly cashed, providing the Treasury with far more money flowing in than money flowing out.
And a handsome surplus there was. But it was notably below the surplus recorded in January last year and way below independent forecasts. The figure for January showed a surplus of £4.7 billion, compared with a £6bn surplus a year ago, and independent forecasts that the surplus would be as high as £8bn.
How so? Receipts from income and corporation tax were down, but these were offset to some degree by higher receipts from VAT and stamp duty. One small consolation for Chancellor George Osborne is that a significant total of late payments recorded by HMRC may help to boost the February totals – assuming those tardy envelopes do contain cash.
The net shortfall on January last year owed much to higher government spending. The steel-capped boot of austerity grinding on the face of the people turns out – yet again – to be a fur-lined bootie.
Last month, central government’s accrued current expenditure was £52.6bn, some £400 million, or almost 1 per cent, higher than in January 2013. And for the period April 2013 to January 2014, central government spending has totalled £534.7bn, which was £6.8bn, or 1.3 per cent, higher than the same period the previous year. Net social benefit spending was £163.2bn, which was £1.7bn, or 1 per cent, higher than in the previous corresponding period.
So, in summary, for the financial year to date, government borrowing was £90.7bn, £4bn lower than at the same point a year earlier. Over 2013-14 so far, government borrowing has shrunk by an average of £400m a month compared with last year, consistent with the Office for Budget Responsibility forecast of a full-year out-turn of £110bn – the Treasury is on target, but little better than on target.
While this represents further progress on deficit reduction, it suggests that there will be little leeway in the Chancellor’s Budget on 18 March for any surprise tax-cutting feature.
Indeed, as matters stand the political pressure is for higher government spending on flood repairs and to boost local government budgets to make good damage to coastal defences, roads and other infrastructure.
By way of aide-mémoire, the total pile of government debt rose further last month to £1.24 trillion, equivalent to 74.6 per cent of the UK’s total economic output. The latest figures are a sharp reminder of how slow and frustrating the process of debt reduction can be. As with household finances, money can be quickly spent but paying down debt takes much longer.
All this suggests that any significant tax-cutting may be deferred from this year – when the benefits could have been felt in voters’ pockets before the general election next May – to the Budget immediately before the election.
This would give Osborne ample opportunity to hold out the prospect of a juicy tax-cutting carrot, providing voters put their cross in the right box.
Adding pressure for such a cut would be the looming spectre of a rise in interest rates in the early part of next year. Economist Martin Weale, a member of the Bank of England’s Monetary Policy Committee, declared last week that “the most likely path for interest rates is that the first rise will come perhaps in the spring of next year, and then the path is likely to be relatively gradual”.
The forecast was notably specific, in contrast to the rather fuzzy rhetoric that has issued from the Bank in recent weeks linking the future path of interest rates to the amount of spare capacity in the economy – a variable on which economists have seldom been able to agree. This followed the demise of the Bank’s policy of “forward guidance”, as the trigger point of unemployment falling to 7 per cent now appears to be much closer than the Bank had forecast – and with recovery still at a very early stage.
According to the MPC minutes released last week, the Bank believes the pace of economic growth will rise by 0.9 per cent in the current quarter, “reflecting a bounce back in construction output but slightly slower services growth”. However, this assumption may now need to be revised in the light of the appalling weather that has disrupted economic activity across the south of England.
Recovery prospects longer-term hinge on business investment and on business spending taking up the slack from household spending. This has been maintained over the past year by households drawing down their savings to make good the shortfall between wage growth and the rate of inflation. But, as the MPC points out, the shift from saving to spending cannot go on indefinitely. A recent survey by the Bank’s agents round the country found respondents expecting “annual pay settlements to be only slightly higher in 2014 than in 2013”.
Overall, sustained consumer spending growth looks far from assured, leaving business investment as the best hope for a continuing upswing. What the Chancellor needs to avoid is the start of a series of rises in interest rates that could dampen business confidence.
All the more reason, perhaps, to put tax cuts on the agenda next year to help counter the impact of rising money costs – and to give working taxpayers a break. A tax cut would certainly help cushion the impact of higher mortgages on household spending. «