This week’s public finances figures showed that borrowing for the full 2017/18 financial year came in at £42.6bn, a whopping £16bn lower than that predicted by the Office for Budget Responsibility (OBR) this time last year. And this is despite the fact that the economy has performed less well than the OBR expected. However, accounting changes have had a favourable effect. And it’s not just the total amount of economic activity that matters for tax receipts, but its composition as well.
Accordingly, there is no guarantee that borrowing will replicate its recent improvement ahead. With consumer spending growth having lost some pace, the immediate outlook for tax receipts is less reassuring. But we expect tax receipts to benefit from a recovery in real pay as the year goes on. And we still think that the OBR is being too pessimistic about the prospects for GDP growth. As such, we doubt that 2017/18 will be the last year in which borrowing undershoots the OBR’s forecasts.
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