Government surplus surges: will this mean giveaways?

Will January's government surplus make this Spring’s Budget a giveaway spectacular?

Squeeze on finances

The Government has reported a £9.4 billion budget surplus for January - up £0.3 billion from same month last year. The question is whether such a bumper month will encourage Chancellor Philip Hammond to loosen the purse strings and deliver some giveaways in his March Budget.

See also: Austerity will be extended 'well into the 2020s', think tank warns

See also: Treasury 'could destroy pensions', warns former Minister

See also: Government restarts privatisation of £12 billion student loan book

Before we get into spending the surplus, some context is useful. For a start, this isn't a sustained and impressive surplus, it's a bumper month. Let's not forget that in the financial year to date we have borrowed £49.3 billion. That's the lowest sum since 2008, but is hardy the balanced budget George Osborne used to talk about.

It's also worth bearing in mind that January is always a bumper month, because this is when so much of the self-assessment tax is paid by freelancers and higher earners. What we're seeing here isn't anything unexpected, it's just marginally more of a bumper month than usual.

This is also to be expected, because we have seen a boom in self-employment. And while this sees larger tax receipts in January, its also worth bearing in mind that it means a smaller tax take for the rest of the year, as more people move from paying their tax monthly to paying it twice a year through self-assessment.

The opportunity

However, Chancellors have traditionally seen surpluses as an opportunity to spend some money in the Budget, without being taken to the cleaners by the opposition. When Hammond delivers his statement on 8 March, this could free him up to do more for the just-about-managing - who have seen plenty of talk about government support, but previous little action.

John Hawksworth, chief economist at PwC, has suggested that Hammond could pledge extra cash to politically sensitive areas, like the NHS and social care. He added that there's an opportunity to respond to the backlash against the hike in business rates, by introducing measures designed to relieve pressure on affected businesses.

Richard Godmon, partner and head of tax at accountancy firm, Menzies LLP would like to see more measures supporting small and medium-sized businesses, such as cutting National Insurance contribution rates or corporation tax.

He says: "While tax receipts are going up, the Chancellor can't afford to act rashly at this sensitive time – just prior to the submission of Article 50 and the start of Brexit negotiations with the EU. By balancing interests carefully, however, he has an opportunity to make changes that will reassure businesses and support investment, whilst also making some sensible simplifications."

The bad news

Unfortunately for those hoping for a spending boom, the government's pronouncements so far seem to be designed to lower people's expectations. In a statement, a Treasury spokesperson said: "We remain committed to returning the public finances to balance and building on our progress in reducing the deficit from 10% to 4% of GDP over the last six years."

The pundits have also been busy pointing out that Hammond isn't like Osborne: he doesn't like producing rabbits out of the hat at the last minute. He will always have known that the January surplus was coming, and that it would be a bonus month rather than a turnaround in public finances. Measures in the Budget will have been nailed down, planned and costed, so it's unlikely a short term blip will persuade him to roll out the whistles and bells.

He is also likely to have a beady eye on future economic developments as the UK leaves the EU - and any potential slowdown as a result. His priority, it seems, will be to keep as much control on government borrowing as possible, and avoid generosity when there's so much uncertainty ahead. It means austerity is likely to remain the name of the game in March.

How we spend our pensions

How we spend our pensions