• 2014 ends on a disappointing note for the public finances…
• …but numbers distorted by a surcharge paid to the EU budget
• Fiscal position should see a boost in January 2015
Martin Beck, senior economic advisor to the EY ITEM Club, comments on yesterday’s public sector finance figures
“On the face of it, December’s sizeable £13.1bn deficit would appear to blow a hole in the Government’s deficit reduction plans. In order to meet the OBR’s Autumn Statement forecast, borrowing in the remaining three months of this fiscal year will have to be almost £10bn, or two-thirds, lower than it was last year.
“However, meeting that forecast is not entirely out of the question. First, the underlying picture for the public finances in December was not quite as poor as the headline figures suggested. December’s borrowing number was distorted by an upward adjustment to the UK’s contribution to the EU budget of £2.9bn (an impact anticipated by the OBR in its forecast). Normally such annual adjustments are paid in December however the European Commission agreed with Member States that payments could be deferred until 2015. Although the cash will be recorded in 2015 the gross liability arises in December 2014.
“Meanwhile, there were some positive developments on the revenue side. Income tax receipts in December saw the largest monthly increase since 2010 and corporation tax revenues were up strongly.
“2015 should have begun with something of a triple whammy of good news for the Exchequer. First, self-assessment tax receipts relating to 2013/14 should see a surge this month. Many high earners deferred income from 2012/13 to benefit from April 2013’s cut in the top tax rate from 50% to 45%. The OBR expects this to amount to an extra £3bn in receipts in January. A second boost should come from strong growth in capital gains tax (CGT) receipts, reflecting the robust rise in equity prices that occurred in 2013 – CGT is paid in the final quarter of the financial year after the year in which the gain is made. Third, debt interest payments should see a sizeable drop, with the steep fall in RPI inflation over the course of 2014 cutting payments on index-linked gilts.
“So following a very disappointing 2014 for deficit reduction, the fiscal position should have begun 2015 on at least a relative high. But the public finances are set to remain a considerable challenge for whichever party, or parties, wins May’s General Election.”