Faster growth to cut billions off deficit as tax revenues surge

Better news on the public finances will be welcome after seven years in which the UK has run up deficits totalling more than £800bn

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Recovering tax revenues and faster growth could prompt the Government’s fiscal watchdog to shave as much as £5bn off the UK’s deficit in this week’s Budget, experts predict.

Just four months ago in March’s pre-election Budget, the Office for Budget Responsibility predicted that the Government would need to borrow £75.3bn in the current financial year, almost £14bn below last year. But the OBR is likely to polish its forecasts following a much stronger start to the financial year than expected.

Official figures show borrowing in April and May already more than £5bn below the last year and on track to undershoot this year’s target easily.

An extra 424,000 people in work over the past year has helped to drive a rapid recovery in income tax and corporation tax takings, leaving the Government’s tax take rising at an annual pace of 4.9 per cent. This is almost twice as fast as the 2.7 per cent growth pencilled in by the watchdog four months ago.

Citigroup’s UK economist Michael Saunders said: “Given recent trends, it is quite likely that the OBR will cut this year’s deficit forecast by £3bn to £5bn.”

The OBR may also choose to raise its growth forecasts for this year from 2.5 per cent, which would filter through to improved borrowing figures. The Chancellor, George Osborne, has also pencilled in £4.5bn in spending cuts and the sale of the Government’s remaining stake in Royal Mail.

Better news on the public finances will be welcome after seven years in which the UK has run up deficits totalling more than £800bn – doubling the national debt to £1.6trn.

Investec’s chief economist, Philip Shaw, said: “There does seem to be some tilt towards better numbers for the outlook for this year and perhaps also the medium-term. The risks to the fiscal outlook now seem to be weighted towards a faster improvement in the deficit, which marks a shift in direction from the majority of the post-crisis years.”

But the uncertainty in Greece – underlined by this weekend’s referendum – is likely to prevent the OBR from being too bullish in its upgrades for the UK’s finances, particularly if it weighs down on a recovering eurozone.

IHS Global Insight’s Howard Archer said: “It is very early days and a lot can happen. Osborne will obviously be hoping that the UK economy grows well over the coming months and that there is not a major fall-out from events in Greece.”

Business leaders have called for the Chancellor to simplify the tax system in order to unleash investment and give more people a stake in the private sector.

The Institute of Directors, which has 35,000 members, wants Mr Osborne to implement a package of measures including lifting the annual investment allowance from £500,000 to £600,000 to help businesses to plan longer-term investment projects.

Simon Walker, director general of the IoD, said: “The painfully complex system of unreliable allowances and competing or overlapping schemes makes it harder for businesses to take long-term investment decisions. For individuals, the process of investing is daunting, meaning many do not even consider it an option.”