ECONOMY

Tax increases “not needed” as UK finances improve says City

U

K government borrowing is falling sharply as the economy recovers, leading to growing hope in the City that increases in income and corporation tax won’t be necessary, certainly not before a 2024 General Election.

The UK government borrowed another £31.7 billion in April as it fought to protect the economy from the worst ravages of Covid-19.

That was £15.6 billion less than the same month a year ago, and more than £7 billion less than forecast by the Office for Budget Responsibility.

In the fight between Boris Johnson and Rishi Sunak for supremacy over the running of the economy, the figures help the Prime Minister since they show an economy responding well to deficit spending.

The Chancellor believes spending needs to fall, and taxes to rise in order to get finances back on track.

Simon French, chief economist at Panmure Gordon, said: “Public spending coming in below forecast illustrates the underlying strength of the UK recovery. Tax rises were never essential during the COVID-19 recovery – and this data is a further blow for those that were itching for them.”

French added: “Borrowing of £32 billion in April was a third lower than a year ago. That picture will further improve as more of the UK economy reopens. It looks likely that the OBR forecast for borrowing of £230 billion in 2021/22 – a forecast made just two months ago – is likely to be a large overestimate.”

Tax receipts to the government also grew by £3.8 billion to £58 billion.

Ruth Gregory at Capital Economics said this reinforces “our view that the tax increases and spending cuts that most fear may be avoided”.

The furlough scheme, due to end in September, is estimated to have cost £63 billion so far.

The UK economy is expected to bounce back strongly this year, with GDP growth of perhaps 7% or 8%.

Gregory added: “We have been saying since the end of last year that rapid economic growth would quickly improve the outlook for the public finances. That means the Chancellor may be spared having to implement his proposed tax hikes/spending cuts before the 2024 general election. It seems that others are just about starting to adopt this view.”

Michael Stelmach at KPMG says the improvement in the public finances might come quicker than after the financial crisis. Then it took five years for the deficit to halve.

“In this crisis we may already see that happen next year,” he said.

The Office for National Statistics now says that the government borrowed a total of £300.3bn in the financial year to March. While that was down slightly from its previous estimate of £303 billion, it remains the highest level since the end of World War Two.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics said:

“The chancellor’s room for manoeuvre on austerity measures will depend on the size of the long-term hit to potential GDP from the recent recession. While ‘scarring’ should be smaller than after past recessions, given that the unemployment rate has remained low, we still see significant costs in the form of diminished investment and an unprecedented exodus of non-UK nationals.”

Sunak said: “At the Budget, I set out the steps we are taking to keep the public finances on a sustainable footing by bringing debt under control over the medium term. But we also need to focus on driving a strong economy recovery from the pandemic.”

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