Chancellor set for short-term fiscal gain, but more long-term pain, as he prepares Autumn Statement
The last set of public sector finance data to be included in the Office for Budget Responsibility’s Autumn Statement forecasts shows that borrowing is already close to £20 billion below the OBR’s previous forecast this year, but the impact of higher interest rates will worsen the medium-term fiscal outlook, the Resolution Foundation said today (Friday)
Borrowing was £81.7 billion during the first six months of the financial year – £19.8 billion below the Office for Budget Responsibility’s forecast at the March Budget. Lower borrowing was driven by higher tax revenues, which were £14.7 billion above forecast, largely due to PAYE, NICs and VAT receipts.
Spending in September was also lower than forecast by £4 billion this month, primarily due to the effects of falling RPI inflation lowering index-linked debt interest costs. However, spending for the first six months of the year remains £2 billion above forecast, as high inflation drives up government spending on goods and services.
The Foundation warns that while debt interest costs may look temporarily lower this month as they reflect falls in inflation, over the longer-term higher expectations for interest rates will leave the Chancellor even less room for manoeuvre in the Autumn Statement. A one percentage point rise in rates currently increasing borrowing by £15 billion in five years’ time.
And while higher inflation is currently inflating tax revenues, it is also increasing pressure on public services, whose budgets were set back in 2021 and will inevitably be revisited before, or more likely after, the next election.
Cara Pacitti, Senior Economist at the Resolution Foundation, said:
“The last set of public finances data to be included in the OBR’s Autumn Statement forecasts shows that higher inflation is driving a revenue-rich fiscal boost to the Chancellor this year.
“However, this short-term gain is likely to be more than offset by longer-term pain as the impact of higher interest rates continues to push up borrowing costs over the coming years.
“Together, this is likely to reduce the Chancellor’s already limited room for manoeuvre as he uses his Autumn Statement to prepare the economic pitch for next year’s General Election.”