Laith Khalaf recalls the origin story of TV's favourite physicist Brian Cox, that of 90s band D:Ream, and their rather famous pop song Things Can Only Get Better...
In 1997 the official song of Tony Blair's election campaign was an upbeat little number called ‘Things Can Only Get Better' by the Northern Irish musical group D:Ream.
Cast aside any memories of John Prescott awkwardly head bobbing along to the pop tune alongside Neil Kinnock and Peter Mandelson, and fast forward to Westminster in 2023, where it might just be possible that Jeremy Hunt is strolling along the corridors of power, gently humming the catchy chorus to himself.
You see the chancellor is about to receive a windfall, to the tune of around £30bn in the coming fiscal year, according to estimates from the Institute for Fiscal Studies.
That is the sum by which government finances have improved since the last Office for Budget Responsibility (OBR) report in November. That doesn't mean the Treasury isn't still borrowing eye-watering sums of money, or that in the medium-term economic forecasts might still put the Exchequer under pressure. But in the immediate future, the chancellor has a bit of breathing room compared to forecasts set out in November.
Big swing factors
There are a number of factors which have conspired to produce this improvement in the short-term outlook for the government's finances. One of the big swing factors is the fall in energy prices, which has dramatically reduced the cost of the energy support the government is handing out to consumers.
Of course, the energy market can giveth and the energy market can taketh away, and volatility in energy prices means we shouldn't entirely count our chickens before they've hatched, though that is somewhat part of the immutable nature of fiscal forecasting.
There has also been a fall in interest rate expectations since November, which reduces the Treasury's anticipated borrowing costs. Partly, this also reflects lower energy prices pushing down on the predicted course of inflation, and by extension, the preventative monetary policy the Bank of England needs to engage in.
But also, the OBR's November forecasts were made in the wake of Kwasi Kwarteng's mini-budget, which sent government borrowing costs spiralling. In the last three months, gilt yields have fallen back, though they have been ominously climbing in recent weeks.
The government is set to benefit from tax revenues coming in above forecasts as well, which have contributed to the government borrowing around £30bn less than anticipated in the current fiscal year.
January's self-assessment tax receipts came in at £21.9bn, the highest recorded figure since records began in 1999. With prices and earnings still rising and tax bands frozen, the government is likely to continue to benefit from extreme fiscal drag in the coming years.
Before we get too carried away about what this means for the health of economy right now though, it's worth reflecting on the fact that January 2023's self-assessment taxes largely relate to activity in the 2021/22 tax year, when the economy was bouncing back from lockdowns and before the invasion of Ukraine sent energy prices soaring.
So the big question is of course what the chancellor intends to do with this boost to the Exchequer's coffers. There is no shortage of options. Freezing fuel duty again seems pretty much inevitable to prevent motorists facing an eye-popping rise in their transport costs, but which could jam the wheels of the economy.
An extension of the energy price guarantee is potentially on the cards seeing as this is currently set to be scaled back from April, though this does then prolong the period of time that government finances are a hostage to the fortunes of the energy market.
One sensible decision would be to abolish or at least increase the money purchase annual allowance, which limits those who have made withdrawals from their pension to a subsequent annual top up of just £4,000.
On top of this, it also means they can't carry forward any unused allowances from the previous three tax years. This would cost relatively little in budgetary terms and would also help to get more older workers back into the workforce, something the government is keen to encourage to help labour shortages, and to boost the economy.
Public sector pay negotiations are another thorny issue which the government could seek to address with the windfall. Perhaps a one-off cost of living payment could be chiselled out of the fiscal headroom, which might help to soothe relations while also keeping the burden of future public sector obligations in check.
The difficulty here is the government believes paying public sector workers more would be inflationary, so they may still be wary of going down this road. Particularly in light of the fact the PM has now staked the government's credibility on halving inflation, even though this is not within his gift.
Any sweeping tax cuts aren't likely on the cards, as only three months ago the chancellor delivered some hefty changes to the tax system, and any reversal would make fiscal policy appear pretty fickle.
The government could instead simply accept some of the extra cash within the public finances, building in some future-proofing, reducing debt interest, and potentially opening up some room for giveaways later this year, or into next. That would help soften voters up and help to banish memories of the chaos of Trussonomics.
Ahead of a looming election in 2024, Mr Hunt may also be minded of a lesser known D:Ream track - ‘Unforgiven'.
Laith Khalaf is head of investment analysis at AJ Bell
