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Fall in government borrowing paves way for tax cuts in the Budget

HM Treasury
By Joe Cooper
23 January 2024
Public Affairs
tax cuts

​New figures published by the Office for National Statistics today revealed that the government borrowed around £6bn less than expected in the year to December, paving the way for a programme of tax cuts in March’s Budget.

​Figures showed borrowing sitting at around £119.1bn for the year to December, falling short of the £124.2 billion project by the Office for Budget Responsibility (OBR) ahead of the Autumn Statement last year. Alongside this, the cost of government debt is also coming down, with interest payments falling to around £4bn, down by £14.1bn from December 2022.  

​These figures have only added fuel to the fire of speculation about a potential round of tax cuts coming in March’s Budget. With a general election looming - whether in May or November - and with a substantial poll lead to claw back, the government will be hoping to use some of this fiscal headroom to put money back in people’s pockets and build on the narrative that economic recovery is underway.  

​Speaking at the World Economic Forum in Davos last week, Chancellor Jeremy Hunt was less than subtle in his nod to potential tax cuts, arguing that countries with lower taxes have more “dynamic, fast-growing economies”. Though the Chancellor was coy on specifics, the news today coupled with speculation over the weekend about the upcoming OBR forecast may give him as much as £20bn to play with.  

Exactly what these tax cuts will look like remains to be seen. Inheritance Tax has long been a bugbear for many in the Conservative Party, though the Prime Minister and Chancellor are thought to favour targeting income tax, ensuring that the benefits of the fiscal headroom are felt by all and not just the wealthy.  

​​While tax cuts remain a popular option, the existence of this fiscal headroom has attracted attention elsewhere in the party. Over the weekend, 40 Conservative MPs wrote to the Chancellor calling on him to step in to help those councils at risk of going under and use some of the fiscal headroom for emergency funding. Expect more calls for how to use this headroom over the coming weeks.   

Despite this, there remain significant challenges for the government. Earlier this week, new research showed that more than 47,000 UK firms are on the brink of collapse, with a 25% jump in the number of businesses facing ‘critical’ financial distress in the final quarter of 2023. Industries such as property and construction were particularly at risk, with the current situation caused by the combination of high interest rates, weak consumer confidence and inflation.  

​While we’re no longer facing the financial crisis that the short-lived Truss administration helped to bring about, it’s clear that these are still difficult economic times, and work is still to be done to give businesses the long-term confidence they need.  ​ 

​Wherever the Chancellor decides to land, the Budget looks set to provide a crucial landmark and perhaps final roll of the dice for the government in the run up to the next election. Get it right, and the Prime Minister may finally be able to start eating into Labour’s poll lead, get it wrong and he may need to start packing his bags.