Jeremy Hunt’s surprising tax windfall: to spend or to hold?

The Chancellor has received an unexpected boost “from the final snapshot of the public finances” before next month’s Budget, said Arthi Nachiappan in The Times. Economists polled by Reuters had forecast a deficit of £7.8bn in January.

But, lo and behold, what was actually delivered was a £5.4bn surplus – fuelled by record self-assessed income tax receipts of £21.9bn: a third up on last year and the highest January figure since monthly records began in April 1999.

The Government’s balance sheet is often in surplus in January, but this year’s had looked like being hit by rising government debt costs and spending on energy support schemes. Instead, the Treasury banked an unexpected tax receipt boost – with “the fall in natural gas prices” an extra boon.

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‘Double-edged sword’

Lower than expected public spending has led to a sizeable undershoot in total borrowing this financial year, compared with the OBR’s forecast in November. The overall bill remains high, said Chris Giles in the FT, but it’s £30bn lower than the £177bn the OBR predicted – meaning that Jeremy Hunt will deliver his Budget cushioned by a sizeable windfall.

That, of course, is “a double-edged sword”. It gives the Chancellor “more options on taxation and spending”, but will also mean more demands on public money at a critical time in public sector pay negotiations. “The Treasury can no longer say there is no spare cash available.”

‘Running out of excuses’

The surplus “could tempt the Chancellor to offer a pay increase” to stop “another wave of strikes”, said KPMG economist Michal Stelmach. Indeed, according to the TUC general secretary, Paul Nowak, the Government is “running out of excuses” to break the deadlock. Rishi Sunak is now reported to be exploring a 5% pay rise for public sector workers – but Hunt “is batting away calls” for an improved offer, on grounds that public finances remain “under pressure”, said The Guardian.

The Chancellor will want “to build greater headroom” into the system to “provide scope for pre-election giveaways”, said Chris Giles. More importantly, he knows that high inflation could hurt government spending plans and leave public services “exposed”. Despite this week’s good news, concluded Cara Pacitti of the Resolution Foundation, Hunt “can’t afford to be relaxed about the state of public finances”.