Public sector net borrowing in the UK was in surplus of £5.4 billion in January 2023, according to figures released by the Office for National Statistics (ONS) this morning.
Compared to a surplus of £12.5 billion in January 2022, the public finances were in a worse position on an annual basis. Aside from public sector net borrowing of £0.9 billion in January 2021, this is the smallest January surplus since January 2015.
However, across the previous months in the 2022/23 financial year, a total downward revision of £5.8 billion in net borrowing was seen. January’s borrowing took public sector net debt, excluding public sector banks, to £2,492 billion. This amounts to 98.9% of GDP, a ratio not seen since the early 1960s.
In line with the Self Assessment income tax deadline, January typically sees a negative net borrowing figure. Indeed, this form of revenue for the Government was the highest among all types in January, at £21.9 billion. Up by £5.5 billion on the year, this marked the highest monthly figure for Self Assessment since records began in 1999. Overall, central government receipts were up by £12.6 billion, or 13.2%, on the year.
The public finances are currently being aided by strong earnings growth alongside frozen income tax thresholds, which together are driving many earners, both employed and self-employed, into higher marginal rates of taxation. Indeed, at £18.9 billion, PAYE income tax receipts were up by £1.8 billion, or 10.6%, on the year in January. An equally strong contribution to the annual comparison came from corporation tax receipts, within which £1.0 billion of the £1.8 billion annual increase was driven by the Government’s Energy Profit Levy.
Yet, developments in government expenditure softened this upward impact of fiscal drag on the public finances. Central government current expenditure was up by £12.0 billion on the year, predominantly driven by state energy bill support. The Government’s Energy Price Guarantee (EPG) and Energy Bills Support Scheme (EBSS) schemes for households, as well as the Energy Bill Relief Scheme (EBRS) for businesses, together saw an additional £8.4 billion in government outgoings when compared to January 2022.
A further significant area of interest in recent months has been expenditure on debt interest payments. This rose by £0.4 billion on the year to stand at £6.7 billion, the largest January figure on record. Interest payments on roughly a quarter of outstanding government debt are linked to inflation on the Retail Prices Index (RPI), which stood at 13.4% in January. Repayment costs on the remainder of public debt also rose in the year to January, however, in line with rising long-term bond yields.
Looking ahead, continuing fiscal drag alongside a reduction in the generosity of energy bill support from April paint a brighter picture for the public finances in the coming 2023/24 fiscal year. Despite fiscal year-to-date borrowing in January being up by £7.0 billion annually, it came in £30.6 billion below forecasts by the Office for Budget Responsibility. Borrowing across the whole fiscal year is still likely to be the highest since the first pandemic year of 2020/21, although the gap between the current year and 2021/22 borrowing is likely to be much narrower than previously thought. This gives the Chancellor a degree of headroom ahead of his Spring Budget in three weeks’ time.
However, relying on fiscal drag to plug the public finances is likely to prove a risky strategy in light of the growing recessionary pressures in the UK economy. Cebr expects the UK economy to contract by 1.3% in 2023, a development that will have the dual effect of dampening the Government’s tax take, whilst also necessitating higher automatic and discretionary expenditure on support.
Karl Thompson is an economist at the CEBR.