Chancellor Philip Hammond expected to bank £12bn from borrowing outperformance in his first Budget

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Chancellor Philip Hammond is expected to retain the money from undershooting borrowing (Source: Getty)

Budget-day forecasts from the independent Office for Budget Responsibility (OBR) are expected to give chancellor Philip Hammond a boost in his efforts to hit his new fiscal targets.

Borrowing could undershoot previous targets by as much as £12bn during the 2016-17 tax year, according to the OBR’s analysis of government borrowing figures up to January.

The government’s borrowing in the tax year up to January reached its lowest level since the financial crisis, at according to the Office for National Statistics.

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Stronger than expected growth in tax receipts – and in corporation tax in particular – were responsible for much of the lower deficit, the OBR said, although some of the better headline performance could also be put down to an accounting change.

While the OBR will have some new data based on February receipts, it is thought to be unlikely the forecasts will show significant variation from what is already confirmed, meaning the chancellor is likely to stay on track to hit the most pressing of his targets: reducing borrowing to less than two per cent of GDP in 2020-21.

This would also put the government in a good position to begin cutting the country's total debt pile by the same point.

However, doubts remain among economists as to whether the chancellor will use his newfound room for manoeuvre for additional spending.

Howard Archer, chief UK and Europe economist at IHS Markit, said Hammond is “likely to be extremely wary of using this”.

Read more: The UK government's deficit reaches lowest since financial crisis

In the Autumn Statement Hammond, who did not vote for the UK to leave the EU, said he will keep “fiscal headroom to support the economy through the transition.”

While Hammond has come under pressure from Conservative MPs to ease the burden of business rates and to boost spending on the struggling social care sector, it is expected he will retain most of the OBR’s forecast windfall in case of economic turbulence as government prepares to trigger Article 50, the first official step in the Brexit process.

“We expect the Chancellor to bank these gains and there is no expectation for any fiscal pump priming to support the economy,” said economists at Investec.

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Growth forecasts could also see some upward revision. In November the OBR predicted annual GDP growth of 1.4 per cent in 2017, rising to 1.7 per cent the next year.

However, this could also be in line for an upward revision, after the UK economy accelerated in the second half of 2016.

Economists will be watching the OBR’s judgement of the effect of a slowdown in consumer spending closely.

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