Rishi Sunak will be able to point to clear evidence of a post-election “bounce” in economic activity when he presents his first Budget next month, thanks to data published this week. But a year-on-year rise in government borrowing underlines the challenges facing the new chancellor if he wants to turn on the spending taps.
Both service providers and manufacturers reported stronger activity and an improving outlook for business in February, according to a survey published on Friday by IHS Markit, the research group.
Its flash composite index of activity across the private sector was unchanged from the previous month at 53.3, a level that suggests the UK economy is likely to return to growth in the first quarter of the year, after grinding to a halt in the run-up to December’s election.
Businesses responding to the survey said the drop in political uncertainty since the election had led to greater willingness to spend among their clients, helping them raise prices to absorb higher costs.
Ruth Gregory, of the consultancy Capital Economics, said it was “a clear signal that the economy has turned a corner”, notwithstanding signs in the survey that the coronavirus outbreak was causing significant disruption to manufacturers’ supply chains and weighing on export orders.
The surveys add to the picture painted this week by official data, which showed continued growth in employment, a post-Christmas recovery in retail sales and a pick-up in inflation that could reflect strengthening consumer confidence.
The housing market is also showing signs of life. In line with recent surveys, provisional figures published by HM Revenue & Customs on Friday showed the number of residential transactions completed in January had risen 4 per cent from December, and 5 per cent from a year earlier.
However, the brightening economic outlook has not been matched by an improving picture for the UK’s public finances.
Official figures published on Friday showed that the surplus in public borrowing usually seen in January — a key month for corporate tax receipts and self-assessment income tax returns — was £9.8bn, £2.1bn smaller than in the same month last year and lower than analysts had expected.
This brought government borrowing for the first 10 months of the fiscal year to £44.8bn, £5.8bn more than in the same period the previous year.
The disappointing outcome for January was partly due to a surge in public spending, which often fluctuates from month to month. But while overall tax receipts grew 3.4 per cent year on year, there was also a notable drop in receipts from corporation tax, likely to reflect the weak business environment in the closing months of last year.
The Office for Budget Responsibility said on Friday that government borrowing over the fiscal year as a whole was still likely to be lower than the £47.6bn it had predicted in its restated March forecasts
But Carl Emmerson, at the Institute for Fiscal Studies, noted that as recently as March 2016, the OBR was forecasting a surplus of more than £10bn for the current financial year, meaning that “we have seen a deterioration of around £55bn in four years”.
The current fiscal rules allow for a big rise in borrowing to fund new infrastructure projects. But the latest figures underline the challenge facing the chancellor if he wants to put more money into public services and still meet a manifesto pledge to eliminate the deficit on day-to-day spending.
“If the chancellor intends to stick to the current fiscal targets, he will have relatively limited room to increase spending compared to the ambitious objectives the government has set,” said Yael Selfin, economist at KPMG.
“With only days to go until the Budget is finalised, the chancellor will need to balance the ambition of levelling up growth across the different parts of the UK economy and maintaining a semblance of fiscal rectitude,” she added.
City economists are betting that Mr Sunak will nonetheless find ways to deliver a fiscal stimulus that will add momentum to the recent pick-up in growth, either by raising taxes, or by changing or bending the fiscal rules.
“There are ways to lift the economy and remain fiscally prudent,” said Kallum Pickering, economist at Berenberg, the investment bank, referring to speculation that the chancellor was considering proposals to curb the system of pension reliefs for higher earners, or for a “mansion tax” on high-value properties.
Philip Shaw, economist at Investec, said: “Our guess is that although there will not be much space for fiscal generosity, the chancellor will find some.”