The chancellor, who has compared himself to his tax-cutting predecessor Nigel Lawson and vowed a giveaway this spring, will now have more wiggle room to lower taxes.
The government borrowed less last month than in any December for four years, but debt remains at historical highs, official figures showed.
The Office for National Statistics (ONS) said that public sector net borrowing hit £7.8bn during the month.
That was around half, or £8.4bn less than, a year earlier and the lowest in any December since 2019. Experts had expected it to hit £11.4bn.
And, thanks to lower inflation, the interest that the government paid on loans was £4bn in December 2023, which is £14.1bn less than a year earlier.
The Resolution Foundation think tank said Mr Hunt had been handed a “timely boost” ahead of the March Budget.
Senior economist Cara Pacitti said: “Lower-than-expected inflation late last year has reduced debt interest costs and given the chancellor a timely fiscal boost ahead of his Budget in March.”
And analysts Capital Economics said Mr Hunt could still meet his fiscal rule, that debt should be falling as a share of national income in five years’ time, with about £20bn to spare for tax cuts.
Deputy chief UK economist Ruth Gregory said that will probably allow Mr Hunt to freeze fuel duty in April 2024 at a cost of around £6bn a year, but perhaps also to announce more crowd-pleasing measures. She added that a a 1p cut to income tax would cost £6.9bn a year and “maintain fiscally prudent appearances”.
It comes after Mr Hunt claimed that the government’s “careful management of the economy” meant he could “start cutting taxes again”.
He went on to liken his record to that of the late Lord Lawson, who presided over a turnaround in the economy with a tax-cutting policy to help Margaret Thatcher win her third term in 1987.
Mr Hunt wrote: “Just as Nigel Lawson positioned the City of London for the finance boom in the 1980s, this period of Conservative government has seen the UK positioned for the massive technological boom we’re set to see in the coming years.”
It is thought that Mr Hunt will opt for personal tax cuts, through either national insurance or income tax, to please voters ahead of an election expected this autumn, as the Tories lag Labour in the polls.
Mr Sunak has also promised there is “more to come” in March, after the government cut the rate of national insurance in November’s autumn statement.
But Ms Pacitti warned that lower inflation is also likely to mean lower tax receipts, affecting how much room for manoeuvre Mr Hunt will have.
And total net debt was still £2.69 trillion at the end of the year, which is around 97.7 per cent of the size of the economy, or gross domestic product (GDP).
Despite the fall in net borrowing last month, the debt to GDP ratio is 1.9 percentage points above last December and still at levels not seen since the early 1960s.
“Protecting millions of lives and livelihoods during Putin’s energy shock and a once-in-a-century pandemic has created economic challenges,” said chief secretary to the Treasury Laura Trott.
“However, it is right that we pay back these debts so future generations are not left to pick up the tab. Because of this government’s decisive action, the economy is now beginning to turn a corner. 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 27 million working people, and an £11bn tax cut to drive business investment."
Interactive Investor’s head of investment Victoria Scholar said: “The reduction in December’s borrowing is a win for the government, providing some fiscal wiggle room to cut taxes in a crucially important year for the Conservatives.”
“The fall in inflation acts as a tailwind to the public purse by reducing the government’s debt interest costs which jumped on the back of rising inflation and interest rates,” she added.