A rebound in receipts from corporation tax and value-added tax, which puzzled experts by their slow growth all last year, meant the Government's finances were in surplus during the month by twice as much as the City expected.
The pounds 4.4bn repayment of debt - the biggest October surplus on record - means the public sector borrowing requirement (PSBR) for the current financial year stands a good chance of hitting the pounds 26.9bn Treasury forecast. However, it will not reach the pounds 22.4bn predicted in last year's Budget.
Even so, economists said yesterday's favourable figure made Kenneth Clarke's task next week much easier. "He can have his cake and eat it. There will be tax cuts and a lower forecast for next year's PSBR in the Budget," said Mike Dicks, UK economist at the investment bank Lehman Brothers.
City analysts expect a minimum Budget giveaway worth around pounds 1bn-pounds 2bn and think up to pounds 3bn - the same as last year - would be acceptable to the financial markets. Anything more generous would be likely to compel the Chancellor to increase interest rates more sharply than he would like ahead of the election.
"Expect good PSBR numbers in the Budget next Tuesday, not large tax cuts," predicted analyst Simon Briscoe at Nikko Europe.
But most economists warned yesterday that signs of improvement in the public finances as the economy picked up did not really excuse any reductions in taxes.
"With a still-high level of borrowing at what might prove to be the peak of the economic cycle, surprises should be banked and not spent," said Kevin Darlington at brokers Hoare Govett.
The pick-up in growth is one explanation for a surge of 24 per cent in corporation tax receipts compared with a year ago, 20 per cent in VAT revenues and 31 per cent in excise duties. Total central government revenues were pounds 28bn in October, 15.6 per cent up year-on-year and well ahead of the growth predicted in the Treasury's cautious summer forecast.
However, the Government's receipts were flattered by several special factors. The payments on account system for VAT brought some revenues forward from November and December.
Mainstream corporation tax payments in October are mainly paid by financial companies, and are expected to exceed the January payment from less profitable industrial and commercial companies. And advance corporation tax receipts were erratically high last month due to unusually high dividend payments during the summer.
Privatisation receipts of pounds 222m in October compared with a mere pounds 50m last year. The current financial year will bring a further pounds 1.25bn from the sale of Ministry of Defence homes and the Housing Corporation's loan book.
These, which are bizarrely classified as negative public spending, will help bring the Government's expenditure in close to its pounds 260.2bn control total this financial year. Yesterday's figures showed that departmental spending was growing at an annual rate of 4 per cent, well above the 1.8 per cent Treasury target.
The cumulative borrowing total for the financial year so far was pounds 11.4bn, down from pounds 18.7bn a year earlier. October was the first month that the underlying running total, excluding privatisations, had turned out significantly below last year's level.
The good news took the gilts market higher yesterday. It was also boosted by an announcement that extra categories of foreign investors would be able to receive interest on gilts without tax deducted, a move of particular benefit to overseas pension and mutual funds.Reuse content