Significant fall in government borrowing in December, figures show.

The UK government’s borrowing saw a notable reduction last month, driven primarily by a robust increase in tax receipts and higher National Insurance Contributions (NICs) that comfortably outpaced public spending. This development provides a glimmer of positive news for the Treasury amidst ongoing fiscal pressures and offers a clearer picture of the nation’s public finances as the current financial year draws to a close.

According to data released by the Office for National Statistics (ONS), government borrowing in December 2023 – representing the gap between the money the state spends and the revenue it collects through taxes – stood at £11.6 billion. This figure marks a significant decrease of £7.1 billion, or 38%, compared to the £18.7 billion borrowed in December 2022. The reduction was more substantial than many economists had anticipated, suggesting a healthier short-term fiscal position than projected. However, despite this considerable fall, the December 2023 borrowing figure remains elevated when compared to pre-pandemic levels, for instance, it was higher than the £8.1 billion borrowed in December 2021, illustrating the lingering cost of recent economic shocks and expanded public services.

Tom Davies, Deputy Director for the ONS public service division, commented on the encouraging trend, stating that the decline was a direct consequence of "receipts being up strongly on last year whereas spending is only modestly higher." This assessment underscores a crucial dynamic: while the government continues to face demands for increased expenditure across various sectors, the revenue side of the ledger is currently performing above expectations.

Delving deeper into the historical context, the £11.6 billion borrowed in December 2023, even with its year-on-year reduction, still ranks as the tenth highest borrowing figure for that specific month since records commenced in 1993. It is important to note that this historical comparison is made without adjusting for inflation, meaning that in real terms, the relative burden of this borrowing might be different. Nevertheless, it highlights the extraordinary levels of government spending and borrowing that have characterised recent years, particularly in the wake of the pandemic and subsequent economic challenges.

The surge in government revenue was a primary driver of the improved fiscal performance. The ONS data revealed that the government collected £7.7 billion more in taxes in December 2023 than in the corresponding month of 2022, representing an impressive 8.9% increase. This boost was broadly distributed across several key tax categories. Income tax receipts saw an uplift, likely benefiting from a resilient labour market, wage growth, and the effects of ‘fiscal drag’, where frozen tax thresholds pull more people into higher tax brackets as their nominal incomes rise with inflation. Corporation tax also contributed significantly, reflecting improved corporate profitability and the impact of the recent increase in the main corporation tax rate from 19% to 25% for larger companies, which came into effect in April 2023. Value Added Tax (VAT) receipts climbed, indicating continued consumer spending, albeit potentially driven by higher prices rather than increased consumption volumes.

A particularly impactful factor was the rise in National Insurance Contributions (NICs). This increase was bolstered by changes implemented in April 2023, specifically the adjustments to the rate of NICs paid by employers. These changes, coupled with a growing employment base and rising average earnings, channeled more funds into the Treasury’s coffers, demonstrating the immediate impact of fiscal policy adjustments on government income. The interplay of these revenue streams provides a clearer picture of an economy where nominal activity, influenced by inflation, is translating into higher tax takes, even if real economic growth faces headwinds.

Looking at the broader financial year, provisional estimates indicate that borrowing over the first nine months, from April to December 2023, totalled £140.4 billion. This figure represents a slight improvement, being approximately £300 million lower than the borrowing recorded over the same period in 2022. As a percentage of the Gross Domestic Product (GDP), borrowing for this financial year-to-date stood at an estimated 4.6%, a reduction of 0.2 percentage points from the previous year. While any decrease is welcome, this £140.4 billion still marks the third-highest level of borrowing over the April-December period on record, surpassed only by the unprecedented levels seen in 2020 during the peak of the pandemic response and in 2022 when energy support schemes and high inflation drove up costs.

The government swiftly responded to the positive figures, with Chief Secretary to the Treasury, James Murray, emphasizing the administration’s commitment to fiscal responsibility. Murray stated that the government was actively "stabilising the economy, reducing borrowing, rooting out waste in the public sector." He highlighted that in the previous year, the government had "doubled our headroom," referring to the margin by which projected borrowing falls below the self-imposed fiscal rules, suggesting increased flexibility for future policy decisions. Murray further asserted an ambitious forecast, claiming the UK is set to "cut borrowing more than any other G7 country," with borrowing anticipated to be the lowest this year since before the pandemic began. These statements collectively paint a picture of a government confident in its economic management and determined to demonstrate progress in controlling the national finances, especially in the run-up to a general election.

However, economists offer a more nuanced perspective, acknowledging the improvements while cautioning against over-optimism. Ruth Gregory, deputy chief UK economist at Capital Economics, observed that public finances were "finally showing signs of improvement in recent months," indicating a shift after a protracted period of fiscal strain. She also pointed to potential further positive developments, noting that "a further improvement in January is on the way." Gregory explained that January figures typically benefit from a "bumper set of self-assessment tax and capital gains tax (CGT) receipts." This is particularly relevant given the government’s ongoing freeze on income tax thresholds, which will likely lead to higher self-assessment income tax payments as more individuals find themselves pushed into higher tax bands. Furthermore, speculation surrounding potential increases in Capital Gains Tax rates by a future government could have prompted individuals to dispose of assets ahead of any such changes, thus boosting CGT receipts in the near term.

Despite these immediate improvements, Gregory tempered expectations by stating that the "big picture is that the pace of deficit reduction remains very slow." This perspective highlights the deep-seated structural challenges facing the UK’s public finances. Long-term pressures such as an ageing population, persistent demand for public services like healthcare, and the ongoing costs of servicing a large national debt mean that sustainable fiscal health will require more than just a few months of improved tax receipts. High inflation, while temporarily boosting nominal tax revenues, also elevates public spending on items such as benefits, public sector wages, and government procurement, creating a continuous upward pressure on expenditures. Moreover, the impact of elevated interest rates means that debt interest payments continue to be a significant line item in the government’s budget, limiting the fiscal space for other priorities.

The December borrowing figures, therefore, represent a welcome respite and an indication that the government’s strategy to increase revenue through various tax measures is beginning to yield results. Yet, they also serve as a reminder of the scale of the challenge ahead. The national debt remains historically high, and the path to achieving long-term fiscal sustainability will require sustained economic growth, careful management of public spending, and potentially further difficult decisions on taxation. As the Chancellor prepares for future fiscal events, these ONS figures will undoubtedly inform the debate on whether there is sufficient headroom for pre-election tax cuts or if continued fiscal consolidation remains the prudent course.