UK July govt borrowing lower-than-forecast at £4.3bn

UK government borrowing came in at £4.3bn in July and lower-than-expected for the first four months of the year, according to official data released on Tuesday.

Economists had expected a deficit of £5bn for last month. In the first four months of the financial year, borrowing stood at 56.6 billion pounds, £13.7bn higher year on year but £11.3bn less than the Office for Budget Responsibility forecast in March.

The Office for National Statistics added that net debt stood at £2.58trln at the end of July, equal to around 98% of the UK’s gross domestic product and 1.9% higher than a year earlier.

Government borrowing will be in the spotlight with a general election which must be called by January 2025 and is expected next year. Prime Minister Rishi Sunak will face calls from his own Conservative MPs to cut taxes as his party trails the main opposition Labour Party in the polls.

However, Pantheon Macroeconomics senior UK economist Gabriella Dickens said that while the government appeared to be on track to come in below the OBR’s forecast, higher gilt yields would prevent Finance Minister Jeremy Hunt from cutting taxes in election year as he had little "wiggle room" to do so.

"In the most recent Budget, (Hunt) gave himself headroom of just £6.5bn if he wanted to meet his target of the debt-to-GDP ratio to be falling in five years’ time. Our calculations suggest that the OBR likely would revise up its forecast for debt interest payments by around £40bn in 2024/25 and by around £20bn in five years’ time if it were to produce the equivalent forecasts using today’s market expectations for Bank Rate and the current level of gilt yields.

Dockens said Hunt could lift borrowing in the near-term and pencil in unspecified spending cuts further down the line to ensure his fiscal rules still were being met, but the turmoil of last October's catastrophic "mini-Budget" of unfunded tax cuts proposed by ex-prime minister Liz Truss "suggests markets likely will be less willing to tolerate plans that aren’t credible, particularly given the current economic backdrop of high CPI inflation".

Reporting by Frank Prenesti for Sharecast.com