UK public sector budget surplus gives Chancellor Hunt "wriggle room"

(Alliance News) - A favourable reading of the state of UK public finances on Tuesday could give Chancellor Jeremy Hunt the fiscal freedom to dial back planned tax hikes.

The UK public sector budget enjoyed a higher-than-expected surplus in January, thanks to record self-assessed tax receipts, according to the Office for National Statistics.

UK public sector borrowing - excluding public sector banks - was in surplus by GBP5.4 billion last month.

This was well behind the GBP12.5 billion surplus of January 2022, but GBP5.0 billion larger than the Office for Budget Responsibility had forecast.

"This is good news for the chancellor of the exchequer as it means that the UK government has borrowed GBP30.6 billion less than OBR forecasts. It also potentially gives him more wriggle room in next month's budget to rethink some of the recent tax hikes, specifically the increase in corporation tax, which has been widely criticised," CMC Markets analyst Michael Hewson commented.

Hunt in November set out a package of around GBP30 billion of spending cuts and GBP24 billion in tax rises over the next five years.

His package is in stark contrast to his predecessor Kwasi Kwarteng's ill-fated plan for GBP45 billion of tax cuts, less than two months ago, which spooked the markets, pushed up the cost of borrowing and contributed to the downfall of Liz Truss's short-lived administration.

Hargreaves Lansdown analyst Susannah Streeter said while Tuesday's data gives Hunt "room for manoeuvre", he is not expected to dole out any "giveaways".

"The expectation still remains that he’ll hold off any bumper giveaways until closer to an election, particularly as he seems so glued to debt reduction plans," Streeter added.

There was more cheer on the UK data front on Tuesday. The S&P Global/CIPS UK flash composite purchasing managers' index marched to an eight-month high of 53.0 points in February from 48.5 in January. Crossing over the 50-point no-change mark, it shows the UK private sector has returned to growth.

The reading was well above the 48.7-point market consensus, as cited by FXStreet,which would have indicated continued contraction.

"UK PMI data suggest a rebound in activity this month with the composite series suggesting a return to growth for the first time since last summer. The data lessen concerns about recession in the UK which have been prevalent for months. The UK has already sidestepped recession in the latter part of last year and the BoE recently forecast that the peak to trough of the anticipated 2023 downturn would be far less than previous anticipated," analysts at Rabobank commented.

By Eric Cunha, Alliance News news editor

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