High inflation boosted the government’s finances in August, putting pressure on the chancellor, Jeremy Hunt, to increase support for state services, a thinktank has said.
Government borrowing was £11.6bn in August and almost £70bn in the first five months of the current financial year. This left the chancellor £11.4bn better off in the 2023-24 year so far than official forecasts predicted in March.
While borrowing last month was up £3.5bn on a year earlier, it was below the £13bn forecasted by the Office for Budget Responsibility (OBR), which is the Treasury’s independent forecaster.
The undershoot on the OBR projections was due mainly to ain increase in VAT receipts to £16.8bn in August, £3.1bn more than forecasted, and a decrease in the government’s monthly interest bill.
The Resolution Foundation said that while higher inflation had fuelled a larger-than-expected rise in pay and prices that had increased income tax, national insurance and VAT payments, it had “strained public services, whose budgets were set before the current inflation shock back in 2021”.
The thinktank said that meant “public services cuts pencilled in for some departments after the next election are even less tenable, and will need to be revisited”.
Calls to increase the budgets of Whitehall departments that deliver public services has been opposed by Conservative backbenchers who want any shortfall in forecasts of government borrowing to be used for tax cuts.
Speaking this week on the anniversary of her disastrous mini-budget in 2022, the former prime minister Liz Truss restated her view that the government should prioritise tax cuts as a way to generate growth in the economy.
Danni Hewson, the head of financial analysis at AJ Bell, said: “There was little doubt the chancellor will be coming under increasing pressure to yank the magic money tree out from under the stairs and plant it proudly in the garden of No 11 ahead of the next election.”
However, she said government spending was still “uncomfortably high, and with the anniversary of the disastrous mini-budget just a few days away”, there would probably be “a reluctance to move away from ultra-prudent policies”.
Hunt said of the borrowing figures: “These numbers show why after helping families in the pandemic we now need to balance the books. That becomes much easier when inflation is under control because higher inflation pushes up interest rates, so we need to stick to the plan to get it down.”
