Pre-budget boost for new chancellor despite borrowing rise | Politics

The chancellor, Rishi Sunak, has been handed a modest boost before next month’s budget from public borrowing rising by less than previously expected, despite the government failing to hit targets set four years ago.

The Institute for Fiscal Studies, Britain’s foremost thinktank for the government finances, said the country was on track to record a budget deficit for the 2019-20 financial year around £3.5bn smaller than forecast in December.

Coming as Sunak prepares to deliver an expansionary Tory budget on 11 March to fulfil a raft of promises made by Boris Johnson before the election, the stronger performance from the public finances could help the new chancellor to deliver an upbeat assessment.

Next month’s budget will mark the first big Commons tax and spending setpiece since late 2018, after the first calendar year without a budget in Britain since at least 1900, due to last year’s Brexit turmoil.

However, the IFS issued a warning that the budget deficit – the shortfall between government spending and income from taxes – was still set to balloon to about £44bn in the current financial year. Although almost double the amount borrowed last year, the figure represents a modest improvement on the £47.6bn forecast in December by the Office for Budget Responsibility, the Treasury watchdog.

It also comes four years after George Osborne said the Tories would eliminate the deficit and generate a surplus, with tax income outstripping state spending, of about £10.4bn this year, in a stark demonstration of Britain’s battered public finances as government spending rises and the economy slows.

Isabel Stockton, a research economist at the IFS, said a deficit of around £3.5bn less than anticipated would please Sunak, who was promoted last week after Sajid Javid’s shock resignation.

However, after missing the targets set in 2016, Stockton added: “Next month’s budget will demonstrate how seriously the latest set of fiscal targets are being taken.”

According to the latest snapshot for the month of January from the Office for National Statistics, Britain generated a smaller than expected surplus of £9.8bn, around £2.1bn less than recorded in the same month a year ago.

City economists had forecast an £11.3bn surplus in January, which is usually a surplus month due to the timing of self-assessed income tax payments.

Against a backdrop of record employment levels in Britain and rising numbers of self-employed workers, the ONS said the value of self-assessed income tax receipts rose by £1.5bn last month to £16.2bn, a record high for January.

However, central government expenditure rose sharply last month, by about 3.6%, as spending on education, defence, health and social care was increased to meet a promisemade by Theresa May, when she was prime minister, to turn the page on austerity.

Alison Ring, the public sector director at the Institute of Chartered Accountants in England and Wales, said: “With headwinds from a weak economy and trade uncertainty, the immediate challenge for the chancellor in his budget next month will be to balance the adoption of credible fiscal rules with investing more into public services and building infrastructure outside London and the south-east.”

Despite the decline in the public finances, a closely watched business survey published on Friday suggested that the UK economy could be at a turning point after weaker levels of growth towards the end of last year.

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According to IHS Markit and the Chartered Institute of Procurement and Supply, growth in manufacturing output accelerated to the strongest level in 10 months, offsetting a slight loss of momentum in the service sector.

February’s IHS Markit/Cips “flash” purchasing managers index, which provides a snapshot of business activity and growth in the UK economy from surveys of companies, was unchanged from a month earlier at 53.3. A reading above 50 indicates growth.

The PMI had risen sharply in January, suggesting rising business optimism since Johnson’s election victory lifted some of the uncertainty hanging over the UK economy.

Tim Moore, an associate director at IHS Markit, said the snapshot suggested that GDP would grow by about 0.2% in the first quarter of 2020. “[The PMI] provides a clear indication that the UK economy is no longer flat on its back,” he added.

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