A modest rise in income tax receipts last month was not enough to salvage George Osborne’s plan for a dramatic cut in government borrowing by the end of the financial year.
In the last report on the public finances before next month’s budget, the Office for National Statistics said income tax receipts jumped by 4.7% compared with January last year to help produce an £11.2bn surplus in January, which is traditionally a healthy month for tax receipts.
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But the chancellor missed City expectations of a £12.3bn surplus and must now limit his borrowing to £7bn for the rest of the year, less than half the sum he borrowed in the same period in 2015.
Osborne has warned of a “cocktail of threats” facing the UK economy this year and the likelihood that growth forecasts will need to be downgraded. He said that this strengthens his argument that Britain needs to balance its budget by 2020.
Howard Archer, chief UK economist at IHS Global Insight, said Osborne is likely to be in the uncomfortable position of having to admit that he will miss his 2015-16 fiscal targets when he stands up to give his budget speech on 16 March.
Archer said the outlook is also worrying because of the slowdown in growth and lower than expected earnings, which threaten the chancellor’s expected tax receipts.
Earlier this week the OECD urged Osborne to relax his deficit reduction plan and channel extra funds into infrastructure projects. The respected Paris-based thinktank said the Treasury had “the fiscal space” to boost spending and generate high-grade jobs and growth.
The ONS said income tax-related payments increased by £6.5bn, or 4.7%, •••••• to £143.7bn. National insurance contributions increased by £3.1bn, or 3.5%, to £91.8bn, while VAT receipts followed a similar path, up by £3.8bn, or 3.7%, to £108.2bn.
Corporation tax, which has been cut to 20% by the chancellor from 28% in 2010 and is due to fall to 18% in this parliament, increased by £1.2bn, or 3%, to £40.5bn
Low government borrowing rates have added another element to the government’s cost reduction agenda, despite a rise in the overall debt total to £1.58tn, equivalent to 82.8% of GDP. The ONS said interest payments decreased by £1.6bn, or 9.4%, to £15.6bn.
Government spending was also restricted, with departmental spending up only 0.9% and welfare spending up 0.7%.
Paul Hollingsworth, a UK economist at Capital Economics, said Osborne will be cheered that tax receipts increased in a difficult economic environment.
In December, the government deficit was £7.5bn, down from £10.1bn in the previous December, illustrating a trend for deficit reduction, though not at the rate predicted by the Office for Budget Responsibility in its November forecast.
Hollingsworth said the trend was likely to continue as employment rates remain at record levels and households, which are still receiving a boost from low energy and food prices, maintain their spending at a solid pace.
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