UK posts tentative improvement, but major fiscal squeeze lies ahead

While April's figures bring more good news on the current health of the public finances, a major and painful re-intensification of the fiscal squeeze will still be required for the Government to obtain an overall budget surplus in this parliament. 

Borrowing on the PSNB ex public sector banks measure of £6.8bn in April was 27% below the £9.3bn recorded in April 2014. Since the OBR expects the deficit to be only 14% lower this year as a whole, this is a positive start to the year. However, estimates for borrowing in the early months of the fiscal year should be taken with a pinch of salt as they are based on more forecast data than those later on. 

In addition, it would be encouraging if the undershoot reflected better than expected tax receipts in response to a strong economic recovery. But current receipts were just 2.7% higher in April than last year, less than both the 3.2% anticipated by the OBR for the whole year and recent rates of growth in nominal GDP.

Instead, the reduction in borrowing primarily reflected a sharp 7.4% fall in overall current expenditure, concentrated in lower departmental spending. It is highly unlikely that this pace of spending cuts can be maintained in future months - indeed, the OBR expects current expenditure to rise by 0.8% this year. 

Looking ahead, GDP is expected to growth at 3% this year means that analysts are hopeful that growth in tax receipts will pick up and exceed the OBR's forecast, according to Capital Economics. Indeed, the weakness of receipts in April partly reflected lower stamp duty receipts due to the pre-election slowdown in the housing market, which is believed to be temporary. However, there is unlikely to be enough positive news on the economic recovery to cause the OBR to change its economic forecasts materially by the time of the Summer Budget on 8th July.

Accordingly, the Chancellor is unlikely to have a 'growth dividend' to dispense in the Summer Budget. So with little wriggle room in the existing fiscal plans, steps towards the Conservatives' unfunded manifesto tax and spending commitments will require extra revenue-raising measures or deeper cuts to other departments' budgets than already planned by the coalition to be announced.