Budget: Chancellor to keep purse strings tight even with unexpected windfall

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Chancellor Rishi Sunak delivers his third Budget on Wednesday and seemingly still with no definitive indicator on how Britain economically is recovering from coronavirus.


At the start of this week, the backdrop was not encouraging. Headlines have been dominated by covid-inspired supply chains issues and shortages, soaring gas prices, a lack of HGV drivers and possible tax rises and interest rate hikes.


A few days on and one set of government borrowing numbers later and it seems that there is a lot more financial wriggle room than anyone thought.


Economically things have generally turned out a lot better than the last fiscal forecast, delivered in March, says Laith Khalaf, head of investment analysis at AJ Bell.


Public finance figures for August show that year-to-date borrowing is GBP31.9bn below where the OBR expected it to be at the last Budget.


Public sector borrowing for the first six months of the 2021/22 year dropped to GBP108bn or by more than GBP100bn but is still more than triple its level before the pandemic, according to the Office for National Statistics.


Today’s flash PMI for October also showed the biggest rise since May, confounding all the gloomy headlines and rising to 56.8 against predictions of another drop.


Services led the way and this recovery will also help the chancellor with his sums as he navigates the country towards calmer waters.


Even so, the emphasis is likely to be very much on keeping spending under control, despite calls from a range of businesses for more support to deal with issues such as soaring energy costs.


“The rumours are that the Chancellor will still keep a very tight grip on the public finances in next Wednesday’s budget to try and bring down borrowing even quicker and build a fiscal war chest to deploy ahead of the 2024 election,” Paul Dales, chief UK economist at Capital Economics, told Reuters earlier this week.


Khalaf also points out that Sunak’s Budget in the spring contained no provision for virus-related spending costs beyond the end of this fiscal year.


The Treasury will be announcing a three-year Spending Review for government departments alongside the Budget with reports that this will include a wide-ranging clampdown on spending.


“The OBR’s inflation expectations will also be a key factor in the health of the public finances, and of course of wider interest to consumers and businesses, who are already experiencing price rises,” said Khalaf.


The latest reading of CPI inflation was way above OBR forecasts at 3.1%, and the Bank of England has forecast inflation of 4% this winter, and “that was before the recent surge in energy prices”.


“We can therefore expect a big jump in the OBR inflation forecast at the forthcoming Budget, which will mean the government paying more interest on the GBP490bn of outstanding inflation-linked gilts in the market.”

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