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The Government has borrowed almost £17bn less than official forecasts predicted so far this year, according to data released a day before Jeremy Hunt’s Autumn Statement.
In the final set of figures before the Chancellor rolls out expected tax cuts on Wednesday, the Office for National Statistics (ONS) said public borrowing stood at £14.9bn in October.
Surging tax receipts mean borrowing so far this year has been £16.9bn less than the OBR predicted in March.
Official figures showed tax receipts stood at £57.9bn in October, £2.7bn more than last year. VAT receipts rose £1.2bn and income tax receipts increased by £1.1bn.
The improvement is largely down to a stealth tax raid that has helped to swell the Treasury’s coffers.
The OBR is expected to reflect this improvement in future years, giving the Chancellor more room to cut taxes than previously thought.
However, while lower than the OBR’s forecast, October’s borrowing bill was higher than the £12.8bn predicted by economists. The overshoot was driven by a record £7.5bn jump in debt interest payments.
The monthly cost was 50pc higher than the £4.9bn OBR anticipated when it set out its forecasts at the time of the Budget in the spring, driven by higher interest rates and sustained inflation. Around one-quarter of the national debt is linked to the cost of living.
At the same time, the Exchequer had to send £9.1bn to the Bank of England to cover losses incurred on the central bank’s bond buying programme, known as quantitative easing (QE).
Ruth Gregory, of Capital Economics, said October’s slight borrowing overshoot was unlikely to “trouble the Chancellor too much” as he delivers the Autumn Statement against the backdrop of next year’s general election.
She said: “With the election drawing nearer, the Chancellor surely won’t be able to resist the temptation to unveil a pre-election splash.”
Mr Hunt is under intense pressure to lower the tax burden after surging income this year. Experts say so-called fiscal drag, which forces workers to hand more of their pay to the taxman as wages increase, will be the equivalent of a 6p rise in income tax by 2027.
Commenting on the borrowing figures, Mr Hunt said: “We met our pledge to halve inflation, but we must keep on supporting the Bank of England to drive inflation down to 2pc. That means being responsible with the nation’s finances.
“At my Autumn Statement tomorrow, I will focus on how we boost business investment and get people back into work to deliver the growth our country needs.”
While lower than OBR forecasts, October’s borrowing tally was the second-highest monthly figure since records began in 1993.
Economists highlighted that public spending has increased sharply this year, which is likely to push borrowing higher for the rest of this year.
Spending on welfare was £4.5bn more than a year ago, which the ONS blamed on “large increases in benefit payments because of inflation-linked benefits updating and cost of living payments”.
Mr Hunt is reportedly preparing to increase a range of benefits in line with prices on Wednesday, in what Rishi Sunak said would be a compassionate approach to welfare.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, also highlighted “larger-than-planned increases in public sector pay” as a driver of higher public spending.
He said the public pay bill would continue to act as a drag on the public finances: “October’s data likely are more indicative of the trend over the coming months, as public-sector pay rises have kicked in mid-way through the year.”
Public sector net debt has risen by 2.3 percentage points over the last year to 97.8pc of GDP, or £2.6 trillion. While the figures are volatile and are often revised, it is likely to remain close to 100pc of GDP over the next few years, according to official forecasts.
Martin Beck, chief economic adviser to the EY Item Club, said the pressure on the public purse from debt payments may start to ease now that inflation is dropping. Interest rates may start to come down next year, potentially allowing for more tax cuts.
He said: “Interest rates are higher than the OBR expected but they have peaked lower than people were fearing a few months ago, the markets are pricing in three rate cuts per year, and that will help bring down debt interest payments as will falling inflation.”
However, a significant overhang is the eventual cost of the Bank of England’s QE programme to the Treasury.
The programme, which ran from 2009 to 2021, made a profit for the Exchequer for most of its lifetime. However, since October 2022 the cash has flowed the other way, as higher interest rates and plunging bond prices mean the Bank is making a significant loss.
The Treasury gave Threadneedle Street an indemnity promising to cover losses when the QE first began and has now made five quarterly payments, so far totalling £38.2bn.
The Bank predicts it will make a net loss of anywhere between £75bn and almost £200bn on QE, depending on how long it takes to sell its bonds and on the path of interest rates.
The portfolio peaked at a size of £895bn. It has since fallen to £748bn as the Bank has stopped replacing bonds as they mature, and is steadily selling gilts into the market.