Lower than expected inflation over the end of last year has
helped to reduce debt interest costs, and in turn reduce
borrowing levels – providing the Chancellor with a timely boost
in the penultimate set of public sector finances data before the
Budget, the Resolution Foundation said today (Tuesday).
Borrowing in December was £7.8 billion – £6.2 billion below the
Office for Budget Responsibility’s (OBR) estimate for this month,
almost all of which was debt interest costs coming in £5.5
billion lower than forecast. The lower debt interest costs were
driven by lower RPI inflation reducing the value of the interest
paid on index-linked gilt values.
The latest data leaves borrowing for the year to date £3.7
billion lower than the OBR forecast back in November, and could
mean that borrowing is revised down in the updated fiscal outlook
publishing alongside the Budget.
However, the Foundation cautions that lower than expected
inflation, coupled with rapidly falling wage growth could reduce
tax receipts in the months ahead and limit the level of extra
fiscal headroom.
Cara Pacitti, Senior Economist at the Resolution
Foundation, said:
“Lower-than-expected inflation late last year has reduced debt
interest costs and given the Chancellor a timely fiscal boost
ahead of his Budget in March.
“However lower inflation is also likely to mean lower tax
receipts. How these factors offset each other will be important
in deciding how much fiscal headroom the Chancellor has.”
