Jeremy Hunt should still give taxpayers “the break they deserve” despite being handed less room for a major Budget giveaway.
Experts say the Chancellor is able to deliver much-needed tax cuts without draining Treasury coffers.
New figures show the government racked up a record surplus last month.
The public sector was £16.7 billion in the black in January, more than double a year ago and the largest surplus since comparable records began in 1993.
The bumper haul was driven by a huge tax take and falling interest costs on debt.
However, it was lower than the £18.5 billion surplus pencilled in by most economists.
Some analysts said this leaves Mr Hunt with a smaller headroom to deliver tax giveaways on March 6 in what is set to be a crucial event for the Government.
The Daily Express exclusively revealed earlier this month that the Chancellor is considering taking an extra penny off National Insurance in his Budget.
But the TaxPayers’ Alliance said Mr Hunt should go further – as he has enough wiggle-room to cut income tax to ease the squeeze on millions of households.
Its chief executive John O’Connell said: “A record high tax burden is filling the Treasury’s coffers like never before, as inflation and frozen thresholds drag millions more into higher bands.
“While debt remains a growing issue for the public finances, an even greater one is the unprecedented squeeze being exerted on household finances by the vice-like grip of increasing taxation.
“The chancellor needs to give taxpayers the break they deserve and cut income tax at the upcoming budget.”
The latest economic data comes after Bank of England boss Andrew Bailey played down the UK sliding into recession at the end of last year, saying the downturn already appeared to have ended.
In a further boost, revisions to data from previous months meant borrowing for the financial year to March should come in below the £123.9 billion forecast by the UK’s fiscal watchdog, the Office for Budget Responsibility (OBR).
Chief Secretary to the Treasury Laura Trott said recent figures show the economy is “beginning to turn a corner”.
“While we will not speculate over whether further reductions in tax will be affordable in the Budget, the economy is beginning to turn a corner, with inflation down from over 11 per cent to 4 per cent,” she said.
The Government typically sees a budget surplus – which takes place when tax revenue received is larger than government spending – in January thanks to self-assessment tax payments.
The surplus widened substantially last month as debt interest payments eased back and without the costly energy support payments that were seen a year earlier.
However, other Government outlays rose faster than expected, while growth in tax receipts came in below expectations, leaving the surplus shy of forecasts.
Despite this, the ONS revealed borrowing in the first 10 months of the financial year so far stood at £96.6 billion, £3.1 billion less than the same period a year ago and lower than the £105.8 billion forecast by the OBR.
Ellie Henderson, an economist at Investec, said Mr Hunt “won’t be celebrating yet”.
She added: “Although the healthy January figure will no doubt be an accolade that the Conservative Party will publicly celebrate, in regard to the read-through to the fiscal headroom available for the upcoming March 6 Budget, today’s data was slightly disappointing.”
It comes amid reports that Mr Hunt has now received the OBR’s latest round of economic and fiscal forecasts, although these will not be published until he delivers the Budget.
Rumours are swirling over possible plans to cut the basic rate of income tax as the Government looks to deliver giveaways with mass appeal ahead of the election.
Martin Beck, chief economic adviser to the EY Item Club, said: “The Chancellor will have room to manoeuvre, but major tax cuts are looking less likely.
“Investors reining back their expectations on interest rate cuts this year, a weaker-than-expected economy, and some fiscal downsides from lower inflation have cut the likely scale of any extra headroom.”
The figures show the UK’s overall national debt was £2.65 trillion in January, an increase on the £2.49 trillion seen a year ago.
It means debt as a share of the economy represented 96.5 per cent of UK gross domestic product (GDP) and remained at levels last seen in the early 1960s, according to the ONS.
Debt interest payments stood at £4.4 billion last month, which was £3.5 billion less than a year earlier and the lowest January figures since 2021.
Britain’s debt interest bill is falling because of the benefit of lower levels of RPI inflation, which impacts index-linked gilt stock.
