Chancellor resists calls for public sector pay boost despite budget surplus

Chancellor Jeremy Hunt appeared to rebuff hopes of any spending largesse or the possibility of improved public sector pay next month, despite official figures showing state finances were stronger than expected.

The Office for National Statistics (ONS) revealed on Tuesday that the Government reported a surprise monthly surplus of £5.4 billion in January, driven by record returns from self-assessed income tax.

But with Mr Hunt due to set out his plans for tax and spending in the Budget on March 15, he played down the significance of the surplus to national finances.

“Pay rises are recurrent and they have a recurrent cost on the Exchequer, and what we see in today’s numbers is not a recurrent change in our national finances,” he told reporters in east London.

“It’s also not anything like as significant as the numbers people are talking about because of the corresponding reduction in windfall taxes. So, it doesn’t change the fundamental outlook and the need for responsibility in public finances.

“The vast majority of the saving that you get from the reduction in energy costs is counterbalanced by a reduction in the predicted income from windfall taxes.”

The comments would appear to dash hopes Mr Hunt could be more generous than expected when he announces his spring statement in the Commons in a few weeks.

Some Tory MPs have been agitating for the Chancellor to priorities tax cuts, as part of a bid to boost growth.

There have also been calls for the Government to better protect vulnerable households, with energy bill support set to become less generous from the start of April

“To make permanent changes in tax and spending that are recurring, year-in, year-out, you need a more fundamental change in national finances, which I’m afraid we haven’t seen,” Mr Hunt said.

Economists had highlighted that public finances are weaker than a year ago but appear noticeably more robust than recent forecasts.

“The extra fiscal headroom should allow him take on some key issues, however – namely corporate reform, boosting workforce participation and preventing a spike in energy bills this spring.”

January’s figure was a £7.1 billion smaller surplus than in January 2022 but was £5 billion larger than had been previously predicted by the Office for Budget Responsibility.

A budget surplus takes place when tax revenue received is larger than government spending.

Economists were surprised by the surplus having predicted borrowing of £7.8 billion for the month, according to a consensus from Pantheon Macroeconomics.

However, Michal Stelmach, senior economist at KPMG UK, said the figures showed finances are more than £30 billion better off than recent OBR forecasts projected.

He said: “Government spending on subsidies – which include the energy support – so far came in £6.8 billion below the £44 billion expected by the OBR this fiscal year, suggesting that milder weather and lower demand for gas have helped keep the cost down.

“Year-to-date borrowing has so far undershot the OBR’s forecast by £30.6 billion, which could tempt the Chancellor to offer a pay increase to public sector workers as part of his Budget next month, hoping to prevent another wave of strikes.”

Paul Nowak, general secretary of the TUC union, said the rosier picture means “the government is running out of excuses” not to offer an improved pay deal.

“Jeremy Hunt must come out of hiding and help break the deadlock on public sector pay,” he added.

However, Martin Beck, chief economic advisor to the EY ITEM Club, stressed that better borrowing figures “may not translate into more fiscal headroom for the Government”.

He said: “The extent to which the OBR deems the improvement in tax revenues to be structural is uncertain, and there’s a question mark over how it will adjust its estimates of the economy’s potential output growth in next month’s Budget.”

This partly offset higher spending as a result of energy support for households and businesses due to rocketing prices.

In January, payments to energy suppliers hit roughly £8 billion as a result of the Government’s price cap schemes.

It also confirmed that the fourth round of payments under the energy bills support scheme – which paid £400 to households over six months to help cut their bills – cost a further £1.9 billion.

The ONS said central government spending jumped by more than £20 billion to £103.6 billion for January, compared with the same month last year.

This included £6.7 billion of interest on government debt – the highest January reading since records began.

January also saw a £2.3 billion charge to the UK brought by the EU and relating to undervalued customs duties on Chinese footwear and textiles while the UK was a member state.

The higher interest payment comes after continued interest rate increases by the Bank of England. The rate is now 4%.

The UK’s overall national debt was almost £2.5 trillion in January, reflecting an increase of £143.4 billion compared with the previous January.

It means debt as a share of the economy represented 98.9% of UK GDP, hitting levels “last seen in the early 1960s”, according to the ONS.