Spending overshoots in the first month of the financial year

The Chancellor ended the 2022/23 financial year with net borrowing £15 billion lower than expected in the Office for Budget Responsibility forecast. This leaves the Treasury with additional breathing space to meet their fiscal rules after the expansionary fiscal policies announced at the Spring Budget, but the debt burden will remain a persistent issue over the medium term.

The OBR released their Economic and Fiscal Outlook alongside the Spring Budget in March of this year. This release forecasts output, inflation, and public sector finances to the 2027/28 financial year (FY). In terms of public sector finances, the OBR forecasts a worsening in the short-term before significant improvements are made with cumulative public sector net borrowing to reach £132 billion this FY before falling to £49 billion in 2027.

Public sector debt is also predicted to follow a similar pattern, peaking at 103.1% this FY before steadily falling to 96.9% by 2027/28. However, despite the large fiscal stimuli announced at the Spring Budget, the tightening introduced in Autumn will still raise the overall tax burden and is estimated to reach a post-war high by the end of the 2027/28 FY including the highest ratio of corporation tax receipts to GDP since the tax was introduced.

The very high debt levels are going to put a strain on public finances through the interest payable. The recent rapid growth in interest rates are going to amplify the payments made and was one of the core costs faced by the Government in April. These levels of debt to GDP ratios haven’t been seen in the UK since the 1960’s and will remain a significant concern for the Chancellor moving forward.

Overall, the OBR’s forecast of public finances put the state of borrowing this FY in similar terms to the previous two. Net borrowing will remain largely similar to both 2021/22 and 2022/23 – well below that of the pandemic year, but still over double the volume of net borrowing seen in 2019/20. It’s not until 2025/26 that the OBR predicts overall net borrowing will return to pre-pandemic volumes. The OBR does recognise risks to their forecasts where government has made aspirations but not formally committed to policies such as whether fuel duty stays frozen, if full expensing is made permanent and commitments to increased military spending.

Although the still UK faces many challenges with tackling inflation, growing the economy and productivity, it is among its peers when it comes to the relative gross debt to GDP the public sector holds. OECD data shows that Canada, the US, Italy, and Japan all have rates above the UK while the UK sits at roughly the OECD average.