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Deficit boost gives Hammond firepower for Budget giveaway

by RUSSELL LYNCH
Boost: Chancellor Philip Hammond has seen the public finances reach their healthiest state for a decade: REUTERS

Chancellor Philip Hammond gained firepower for a multi-billion giveaway in the Autumn Budget on Tuesday as upbeat official figures revealed that the public finances in their healthiest state for a decade.

The latest deficit data showed borrowing fell sharply by £1.1 billion to £7.8 billion last month, marking the best April for the Treasury coffers since the eve of the financial crisis in 2008.

Borrowing for the year to March was also sliced to £40.5 billion, nearly £5 billion lower than the Office for Budget Responsibility’s forecast and the lowest since 2007.

Factors behind the big drop in borrowing included a much lower interest bill for the Government on its inflation-linked debt pile, as the cost of living eased back over the past 12 months, saving the Treasury £1 billion.

On the revenue side, the economy generated an extra £1.4 billion extra in income tax compared with a year earlier and the new tax on sugary drinks generated £13 million in its first month, the Office for National Statistics said.

The OBR’s borrowing target for the new financial year is £37.1 billion. Experts poring over the figures said Hammond, who hinted at possible belt-loosening in his recent Spring statement, was already on course to undershoot this forecast if the trend persisted.

Hammond is aiming to cut the underlying deficit to 2% of GDP by 2020, but Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The Chancellor has plenty of scope to soften his austerity plans in the autumn, given that the Spring statement plans incorporated a £15.4 billion, or 0.7% of GDP, margin for error in meeting his main fiscal target. The removal of the drag on GDP growth from fiscal policy should enable the economy to gather some momentum next year, giving the monetary policy committee a freer hand to raise interest rates.”

The surprisingly buoyant figures come despite disappointing 0.1% growth in the first three months of this year, which would usually damp revenues.

PwC chief economist John Hawksworth said: “It does seem likely that this will carry through into a lower deficit this year than the OBR forecast in March, giving the Chancellor a bit more wiggle room for this Budget.

“The fact that tax revenues seem to have held up reasonably well in the first quarter of this year seems more consistent with the buoyant labour market data than the rather downbeat GDP estimates published in late April.”