Some better news on the PSNB ex, which posted a surplus of £5.4bn in January. Total income tax receipts have turned higher, up 12.7% y/y (6-month moving average), the strongest since November 2021. In short, the PSNB ex is outperforming OBR forecasts, but is still larger than last year’s deficit.
It should be stressed: these better PSNB ex numbers reflect a stronger economy. The underlying pressures on public spending remain acute. The Bank of England has underestimated the strength of the economy. Real GDP growth may be close to zero, but this reflects hours lost in part due to strikes. This does not presage weaker inflation further down the line. Furthermore, if inflation stays higher than expected, this will aggravate public sector strikes, putting additional pressure on the PSNB ex moving forward. The case for further rate hikes remains.
Junior doctors have voted to strike for 72 hours next month. It marks a significant escalation in the row between NHS staff and the government. The Royal College of Nursing announced last week a 48-hour strike starting March 1st, that would affect more than 120 NHS trusts. Alongside the pressure for large public sector pay increases, there will also be a big push for higher defence spending: Ben Wallace has called for an increase of between £8-11bn.
The Gilt market is sniffing out that there is no easy path to sustainable public finances. The LDI crisis has long gone, but the 30-year Gilt yield is up to 3.89%. Ultimately, a material improvement in the PSNB ex won’t occur unless productivity increases. Public sector productivity is still 7.4% below its pre-coronavirus level.
