IFS analysis of today’s public finance figures: February 2016

Today the Office for National Statistics and HM Treasury published Public Sector Finances January 2016. We now have details of central government receipts, central government spending, public sector net investment, borrowing and debt for the first ten months of financial year 2015−16.

Thomas Pope, a Research Economist at the IFS, said:

“As is usual, and was expected, the government ran a surplus in January, with receipts exceeding spending by £11.2 billion. Receipts of capital gains tax were strong and those of corporation tax were weak, both of which were anticipated by the OBR. Self-assessment income tax receipts were weak in January, although it is possible that – with the last two days before the payment deadline falling at the weekend – some of the strong growth in receipts expected this year will be reflected in next month’s numbers.

A simple extrapolation of borrowing over the first ten months of this financial year suggests that it is on course to come in closer to £80 billion than the £73.5 billion forecast by the OBR. But £4 billion of this apparent overshoot is accounted for by rapid growth so far in investment spending which may well not persist. Were borrowing to come in at around £76 billion this should be considered to be very close to the OBR’s November forecast.

In the forthcoming Budget the key issue will be the forecast for borrowing in 2019–20 as Mr Osborne has committed to eliminating the deficit by that year. The last OBR forecast suggested he had a surplus of £10 billion. But this could easily be eliminated by a weaker outlook for the economy, even if associated with a reduction in forecast debt interest spending. Any Budget giveaways – for example to deliver manifesto commitments to reduce income tax, or to cut taxes on North Sea oil and gas producers – would make it harder to deliver a budget surplus.”

Further analysis

Receipts

Central government receipts were 3.4% higher this January than last (see Table), but this is slower than the forecast growth between December and March implied by the OBR’s November forecast. They expect receipts to increase by 3.8% in the year as a whole, and by 5.3% in the last four months of the year compared to the same period in 2014–15. Some good news on capital gains and PAYE income tax was offset by worse than expected receipts in other areas, most notably self-assessment income tax.

Table: Growth in receipts, spending and borrowing over the year to date

Capital gains receipts grew strongly, by 27.7% on January last year and above expectation. This was partly due to strong house price growth over the last year. However, self assessment income tax receipts were up only 1.6% on the same month last year, compared to an OBR estimate of 5.3% for the year as a whole. The 30^th and 31^st of January (when tax returns are due) both fell on a weekend this year, so it could be that some of these receipts will spill over into February.

Corporation tax receipts were 7.8% lower this January than last, partly reflecting the fact that oil companies (whose profits will have been hit by low oil prices) make one of their three annual payments in this month. Over the year as a whole, Corporation tax receipts are still on course to meet the OBR forecast. Although receipts were weak this month, the vast majority of this year’s receipts have already been collected and a weaker performance towards the end of the year was already factored into the OBR forecast.

Apart from income tax, the other two largest taxes (NICs and VAT) both underperformed relative to forecast. The OBR’s November forecast implied these receipts would grow by 4.1% and 3.6% respectively in the last four months of this year compared to the same period last year. However, in January NICs receipts grew by only 3.7% on the same month a year earlier, while VAT receipts grew by just 2.7%.

Spending

While receipts may have been disappointing for the Chancellor, the spending figures will have made for somewhat happier reading. Spending increased by 2.8% compared to January of 2014–15 but remains on track to undershoot the OBR’s forecast for the year as a whole. The OBR’s November forecast implies annual spending growth of 1.1%, while in the year to date spending has increased by only 0.8%.

Within this, debt interest spending has been particularly low. If the current growth rate were to persist for the year as a whole, debt interest spending would undershoot the OBR’s forecast by £1 billion. However, it is unlikely that debt interest spending would end up so far below expectation.

The full picture

If the year on year growth pattern of the last 10 months were to persist for the rest of the year, today’s figures imply that total public sector net borrowing would be £79.3 billion, £5.8 billion more than the OBR forecast in November. However, £3.8 billion of this difference arises from the fact that Public Sector Net Investment has been higher than forecast so far this year, and it might well be that strong growth in spending so far this year will not persist into February and March.

Further information and contacts

For further information on today’s public finance release please contact: Carl Emmerson, Thomas Pope or Gemma Tetlow on 020 7291 4800, or email @email, @email or @email.

Next month’s public finances release is due to be published on Tuesday 22nd March 2016.

Relevant links:

This, and previous editions of this press release, can be downloaded from http://www.ifs.org.uk/publications/browse?type=pf

Office for National Statistics & HM Treasury, Public Sector Finances, January 2016: http://www.ons.gov.uk/ons/rel/psa/public-sector-finances/january-2016/index.html

Office for Budget Responsibility analysis of monthly Public Sector Finances, January 2016: http://budgetresponsibility.org.uk/monthly-public-finances-briefing/

Office for Budget Responsibility, Economic and Fiscal Outlook, November 2015: http://budgetresponsibility.org.uk/efo/economic-and-fiscal-outlook-november-2015/

HM Treasury Autumn Statement and Spending Review 2015: https://www.gov.uk/government/topical-events/autumn-statement-and-spending-review-2015

ENDS

Notes to Editors

1. Central government current spending includes depreciation.

2. Where possible we compare figures on an accruals basis with the Office for Budget Responsibility forecast.