Osborne gets breathing space with £3.7bn fiscal surplus

Britain's public finances enjoyed that rarest of months in January: a surplus rather than a deficit for which further borrowing was necessary. Government receipts exceeded spending by £3.7bn last month, the Office of National Statistics revealed yesterday, the best month for the public finances for two-and-a-half years.

January is usually one of the best months of the year for tax receipts, with corporation tax bills falling due and many taxpayers settling their selfassessment accounts too. Last month was also the first in which the Exchequer benefited from the increase in value added tax, the rate of which was raised from 17.5 per cent to 20 per cent at the beginning of the year. That rise alone brought in an additional £600m of revenue.

Even taking those factors intoaccount, however, last month was still particularly strong. It compares with a deficit of £1bn in January 2010, forexample, and the headline figure was significantly above most economists' forecasts.

The data will buoy George Osborne, the Chancellor of the Exchequer, who is due to unveil his Budget a month today. "This should give the Chancellor a little more wiggle room," said Samuel Tombs, UK economist at the think tank Capital Economics.

The total deficit for the 2010-11 financial year now stands at £113bn, around £14bn less than at the same stage of last year. The Office of Budget Responsibility's most recent forecast was for a final figure of £149bn for 2010-11, but the City is now expecting borrowing to come in at £10bn below that level.

A spokesman for the Treasury said the figures were an early vindication of Mr Osborne's determination to rein in spending, but warned the Chancellor would not ease back.

"It's welcome that this January saw the first surplus for the public finances in two years but it will take more than one month to deal with borrowing of almost £150bn for this financial year," he said. "The Government is determined to stay the course."

Total borrowing of around £150bn this year would equate to a deficit of around 10 per cent of GDP – and take Britain's total debt to almost 58 per cent of GDP.

Hetal Mehta, an economist at Daiwa Capital, said there was still a danger that Government forecasts might be proved overoptimistic. "Looking further ahead, we are less sanguine about the outlook," she said. "With growth set to remain subdued over the coming quarters and unemployment rising, there is a real danger the Government will end up borrowing more than it currently expects."

Rate fight back

Adam Posen, the US economist who serves on the Bank of England's Monetary Policy Committee, last night sought to counter the campaign for an interest rate rise to counter inflation.

The minutes of the MPC's most recent meeting, published today, are expected to show two members voted for a 0.5 percentage-point rate rise last month. Andrew Sentance and Martin Weale are anxious that persistently high inflation will raise expectations about prices – were that to translate into higher wage demands, a spiral could develop.

However, Mr Posen warned he "could not rule out" a period of deflation if monetary policy was tightened. "It would be a mistake for the MPC to try to prove its counter-inflationary toughness just for the sake of chatter about rising inflation expectations that is not there in the data," he said.