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UK Borrowing Decreases as Tax Hikes and Inflation-Driven VAT Boost Government Coffers

UK Borrowing Decreases as Tax Hikes and Inflation-Driven VAT Boost Government Coffers

The UK's borrowing has decreased, as tax hikes and inflation-driven VAT netted from rising prices have helped boost government coffers.
The budget deficit in June was £18.5bn, down from £20bn in May, according to the Office for National Statistics (ONS).

The deficit took borrowing in the first three months of the financial year to £54.4bn, which is £12.2bn more than the same period last year but £7.5bn less than expected.

The ONS also revised down its April-May borrowing estimate by £7bn, with stronger than expected tax revenues following November's budget announcements.

Inflation, driven by high prices, has played a role in boosting VAT receipts by 9% this financial year compared to last year, despite no increase in the underlying rate.

However, borrowing remains high after the shocks of the COVID-19 pandemic and last year's energy price surge fueled by the Ukraine war.

In addition, the government's reluctance to cut taxes ahead of a general election expected next year, with the party trailing behind Labour in the opinion polls, has contributed to the decrease in borrowing.

The Conservatives lost two parliamentary seats on Friday and narrowly held another.

While the better-than-expected performance of the economy in early 2023, which effectively flatlined but avoided a recession, has helped the government, the interest the government paid on its debt last month was still the third-highest of any month on record, despite being significantly less than the £20bn payments in June last year.

Samuel Tombs, an economist with Pantheon Macroeconomics, believes that the better news on recent public borrowing will not be celebrated much at the Treasury as the outlook for debt interest payments has worsened.

He added that the chancellor will not have scope to cut taxes meaningfully before the next general election.

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