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Blow for Hammond as borrowing widens amid consumer slowdown

Government borrowing rose unexpectedly last month to its highest April level since 2014 - in figures that appeared to show the strain on consumers taking its toll on public sector finances.

The Office for National Statistics (ONS) said borrowing - excluding the impact of bailed-out banks - grew by 13% compared to last year to £10.4bn. Economists had expected a slight fall.

Treasury revenues were held back by stalling VAT receipts, which climbed by just 0.2%, at a time when rising inflation is squeezing household spending power.

It appeared to be the latest sign of consumers tightening the purse strings - and came as separate CBI figures showed retail sales weakened in May after a bounce in April.

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The worse than expected public finance performance is a blow to Chancellor Philip Hammond at the start of the 2017/18 financial year as he seeks to bring the UK's borrowing under control.

Mr Hammond is trying to bring down the deficit - the gap between what the Government spends and the money it receives - which has already come down since the post-recession period.

But official forecasts already acknowledge the current year is likely to see a blip with borrowing climbing year-on-year.

There was some cheer for the Chancellor elsewhere in the data, as borrowing for the 2016/17 year to March was revised down to £48.7bn.

That meant it beat a target set by the Office for Budget Responsibility rather than narrowly missing it as earlier figures had suggested.

Scott Bowman, UK economist at Capital Economics, said: "April's public sector finances set the scene for a rise in borrowing for the 2017/18 fiscal year as a whole.

"The subdued revenue growth partly reflected weak VAT receipts growth - another sign that consumer spending growth has slowed recently."

HSBC economist Liz Martins said: "For whoever wins the 8 June election, deficit reduction may be a harder task than it has been, with the low inflation boon having dissipated, and easy wins having already been made."

Figures from the start of this year have pointed to weakening retail sales and though there was an Easter-inspired bounce-back last month the latest CBI figures for the year to May appeared to show this had faded.

Alpesh Paleja, CBI principal economist, said: "It's clear that households are increasingly feeling the pinch, as rising inflation pushes down on real earnings."