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The UK government borrowed much less than expected in December, in a boost to chancellor Jeremy Hunt’s plans to cut taxes ahead of this year’s expected general election.

According to data published by the Office for National Statistics, public sector borrowing fell to £7.8bn last month, about half the sum borrowed a year earlier and the lowest figure for a December since 2019.

The figure, which was driven down by inflation-related debt interest costs, is substantially lower than the £14bn prediction for the month from the Office for Budget Responsibility, the UK’s fiscal watchdog.

Hunt is seeking more room for giveaways ahead of the election as the governing Conservative party consistently trails behind the Labour party in opinion polls.

In November’s Autumn Statement, Hunt cut business and personal taxes by £20bn, but this did not stop the projected tax burden from continuing to rise.

The chancellor and Prime Minister Rishi Sunak have since been touting the prospect of pre-election tax cuts in the upcoming Budget as they bank on getting extra “headroom” against the UK’s key fiscal rule, which requires the ratio of public debt to gross domestic product to be falling in five years’ time.  

The tax-cutting measures outlined in the Autumn Statement, alongside other budgetary decisions including on welfare spending, left the chancellor a projected £13bn of headroom. However, economists say this could increase because of declines in payments of debt interest as markets bet on Bank of England rate cuts. 

The ONS said the government’s debt interest bill last month was the lowest for a December since 2020 as inflation declines. 

Ruth Gregory, an analyst at Capital Economics, said that after nine months of the fiscal year 2023-24, government borrowing was on track to undershoot the OBR’s full-year borrowing forecast of £123.9bn by £5bn.

Given lower interest rate expectations, the chancellor may end up with fiscal headroom of about £20bn in the March Budget, she said, allowing him to unveil “crowd-pleasing measures” such as a 1p cut to income tax, which would cost £7bn a year.

The amount of headroom Hunt has to play with will depend on how fiscal and economic forecasts from the OBR evolve in the coming weeks ahead of the March Budget.   

Laura Trott, chief secretary to the Treasury, said the economy “is now beginning to turn a corner”, adding: “Inflation has more than halved. Debt is on track to fall as a share of the economy. And we have been able to afford tax cuts for 27mn working people, and an £11bn tax cut to drive business investment.”

Public sector net debt, excluding state-owned banks, remains on an upward trajectory, however. It stood at £2.69tn in December, or about 97.7 per cent of GDP — higher than the ratio the same time one year earlier.