After the surge in energy prices caused by the COVID-19 pandemic and the conflict in Ukraine, the Chancellor of the Exchequer Jeremy Hunt reiterated the need to avoid unnecessary spending as the deficit remains high.
The good news is that with the increase in taxes and soaring prices, the additional VAT revenue is helping to strengthen the UK’s financial reserves and reduce its borrowing levels. The Office for National Statistics (ONS) reported that as of June, the fiscal deficit was £18.5 billion, less than the £20 billion a month earlier and below the experts’ prediction of £22 billion.
The total borrowing for the first three months of this fiscal year was £54.4 billion, an increase of £12.2 billion compared to the same period last year, but £7.5 billion less than forecasted. The ONS also downgraded its borrowing estimates for April and May by £7 billion, as the tax revenues from the increased taxes announced by the government in November last year exceeded expectations. The surge in inflation-driving price increases also played a role, with VAT revenues growing 9% compared to the same period last year.
However, despite these developments, the UK government’s overall borrowing levels remain high, and last month’s data marked the third-highest June government borrowing since 1993.
The deficit issue remains unresolved, and there are calls for tax cuts from the public. The prime minister and chancellor are currently under tremendous pressure, arguing that they are unable to reduce tax levels in the short term. With the upcoming elections next year, the Conservative Party is still lagging behind the Labour Party in opinion polls.
Hunt stated that the UK is currently at a critical moment and must maintain discipline in public finances, avoiding any imprudent spending. He also promised that people will soon start to see the effects of inflation reduction, economic growth, and debt reduction.
However, it is undeniable that as of June, the country’s public debt has exceeded GDP and has paid £12.5 billion in interest, reaching the third-highest data in history. Faced with significant debt interest payments, the improvement in public borrowing seems to be offset. Economist Samuel Thomas suggests that the Chancellor has no room for substantial tax cuts before the next general election.