Analysts said lower-than-expected government borrowing last month raised the possibility of tax cuts in the Budget.
Borrowing, the difference between spending and tax revenue, fell to £7.8bn in December, according to the Office for National Statistics (ONS).
Interest payments have fallen significantly due to the rapid decline in inflation.
Analysts said the latest figures could give the chancellor “room” to cut taxes.
Borrowings in December fell by £8.4bn on the same month last year, the lowest level for the month since 2019.
Interest payments on government debt fell by £14.1bn to £4bn from December 2022.
Last year’s decline in inflation provided a tailwind. Government interest payments are tied to the retail price index, which measures inflation.
Ruth Gregory, deputy chief UK economist at Capital Economics, said the better-than-expected December figures gave the prime minister “a little more room to make a big pre-election splash in the spring budget on March 6.” Deaf,” he said.
Treasurer Jeremy Hunt signaled last week that he intended to cut taxes.
Speaking at the World Economic Forum in Davos, he said countries with lower taxes have “dynamic, faster-growing economies.”
Expectations had grown that the Bank of England would start cutting interest rates this year after a fall in inflation last year.
Lower interest rates could cause the government’s economic forecasting agency, the Office for Budget Responsibility, to lower its future borrowing forecasts.
Analysts say this will give the government more room to cut taxes while adhering to self-imposed limits on spending and borrowing.
“It looks likely that there will be some high-profile tax cuts in the spring budget,” said Martin Beck, chief economic adviser at EY Item Club.
According to ONS data, borrowings for the nine months to December 2023 were £119.1bn, up £11.1bn on the same period last year and the fourth highest total on record.
The total debt the government has accumulated over the years was £2.67 trillion at the end of December.
This is equivalent to 97.7% of the size of the UK economy, measured by gross domestic product (GDP), and is at the level last seen in the early 1960s, the ONS said.
Government borrowing has increased rapidly in recent years. The government has spent billions of dollars to support the economy during the coronavirus pandemic and subsidized energy bills when costs soared after Russia’s invasion of Ukraine.
“Protecting millions of lives and livelihoods during the Putin regime’s energy shock and a once-in-a-century pandemic has created economic challenges,” said Treasury Secretary Laura Trott.
“But it is right that we pay down these debts so that future generations do not have to pay for them.”
Labour’s shadow chancellor of the exchequer, Darren Jones, said: “The national debt is currently at its highest level since the 1960s and has more than doubled since 2010.”
“Britain cannot afford another five years of a low-growth, high-tax Conservative government that is making working people’s lives even worse.”