UK borrowing rises in April, making pre-election tax cuts harder for Sunak

By William Schomberg and Andy Bruce

LONDON (Reuters) -British public sector borrowing exceeded expectations in April, underscoring the challenge for Prime Minister Rishi Sunak and finance minister Jeremy Hunt who say they want to cut taxes further as they prepare for a tough election.

Net borrowing excluding state-controlled banks was 20.5 billion pounds ($26.05 billion) last month, 1.5 billion pounds more than in April 2023, official data showed on Wednesday.

It was higher than the median estimate of 19.3 billion pounds in a Reuters poll of economists which was also the expectation of the government's budget forecasters.

The deficit for the financial year ending in March was higher than thought, the Office for National Statistics said.

The figures underscored the limited room for more sweeteners by the government ahead of the national election later this year, which opinion polls suggest the ruling Conservative Party will lose heavily.

"April's public finances figures got the new 2024/25 fiscal year off to a shaky start and cast further doubt on the Chancellor's ability to unveil big tax cuts," Alex Kerr, an economist at consultancy Capital Economics, said.

Conservative lawmakers have said they are hoping for further tax cuts before the election and Sunak has sought to create a clear dividing line on tax with the opposition Labour Party by saying he wants to axe all social security contributions paid by workers in the long term.

The International Monetary Fund warned Britain's government on Tuesday it was on course to miss its debt target and said tax rises, rather than cuts, were likely to be needed to repair the public finances after the COVID pandemic and the surge in energy prices.

Separate data published on Wednesday delivered another blow to the government as core inflation pressures remained strong in April, dashing expectations of an interest rate cut by the Bank of England in June.

PRESSURE ON THE BUDGET

Hunt's latest budget published in March met the government's fiscal targets for cutting public debt as a share of economic output in the fifth year of official forecast by a only slim margin of 8.9 billion pounds.

Announcements since then - including a commitment to ramp up defence spending to 2.5% of GDP, and a multi-billion pound compensation programme for some victims of a contaminated blood scandal - have already eroded that margin.

Public sector revenues in April grew by 1.6 billion pounds from a year earlier but were outstripped by a 3.1 billion-pound rise in spending, reflecting higher inflation-linked welfare benefits and the impact of inflation on government purchasing.

The statistics office said public sector net debt excluding public sector banks at the end of April 2024 stood at 97.9% of gross domestic product, up 2.5 percentage points from a year earlier and at levels last seen in the early 1960s.

It slightly raised its estimate for the budget deficit in the recently ended 2023/24 financial year to 121.4 billion pounds from its initial estimate of 120.7 billion pounds published last month - equivalent to 4.5% of economic output, against 4.4% previously.

The full-year outcome was 7.3 billion pounds higher than expected by the Office for Budget Responsibility, whose forecasts underpin the government's tax and spending plans.

The OBR expects the deficit for the 2024/25 year to narrow to 87.2 billion pounds, or 3.1% of GDP.

($1 = 0.7869 pounds)

(Reporting by William Schomberg; Editing by Suban Abdulla and Tomasz Janowski)