Annual Government borrowing drops unexpectedly to lowest in three years

Danni Hewson, head of financial analysis at AJ Bell, said: “This is a bit of a cup half full moment for the government. The amount of cash they needed to borrow last year came in slightly below what the OBR had forecast, and significantly down on the previous year.

“In fact, as a percentage of GDP the £132 billion borrowed to offset the difference between what was coming in and going out fell to the lowest level since before the economy was upended by the Covid pandemic.

“Narrowing the focus to just the month of March, the extra money needed to cover increases to spending on things like pay and pensions was more than offset by the increased tax take – primarily that change to employer National Insurance which padded coffers by an extra £3.5 billion.

“But just as one swallow does not make a summer, one year doesn’t necessarily mean government finances will continue to improve.

“The Iran war has thrown a great big spanner in the works, hiking government borrowing costs and reigniting inflation which is expected to have a knock-on to employment numbers. There’s also the issue of domestic politics as next month’s local elections hurtle towards us and speculation mounts that there will be a change in Number 10 – and that could also mean a new chancellor.

“Looking at 10-year gilt yields since the end of February, there has been a massive spike. That’s been exacerbated lately by continued scrutiny of Keir Starmer over his appointment of Peter Mandelson as ambassador to the US.

“A change in leadership could mean a change in fiscal policy, and with all that carefully crafted headroom already under pressure, big policy decisions would likely require turning the tap on borrowing – something that could challenge markets.”