Yahoo Finance Budget deficit leaps as Brexit-fuelled inflation troubles Hammond
The government was forced to borrow more than expected in June after a jump in the UK’s budget deficit to £6.9bn – almost 50% higher than the same month last year.
The sharp rise followed a spike in the cost of financing the UK’s debt, a drop in corporation tax receipts and a larger than forecast contribution to the EU in June.
There is growing pressure on the chancellor, Philip Hammond, to loosen the public purse strings but some analysts said the figures are likely to toughen his stance on pleas from ministers for extra funds.
There was good news for the chancellor after data indicated that the dramatic slowdown in the economy during the first quarter had so far failed to reduce tax receipts. Corporation tax fell by more than 4% compared with June last year but all the main sources of tax receipts – income tax, national insurance and VAT – were up more than that predicted by the Treasury’s independent forecaster, the Office for Budget Responsibility (OBR).
The Treasury said the persistent shortfall in the government’s income compared with spending illustrated the need for a “credible fiscal plan” that allowed ministers to support “sound public finances” while “promoting a stronger economy”.
Opposition parties were quick to say that the higher deficit showed that austerity had failed and was delivering weaker public services without strengthening the public finances or the economy.
The deficit is already expected to rise from full-year borrowing of £46bn last year to £58bn this year.
With a queue of government departments clamouring for inflation-busting rises in their funding before the autumn budget, the early signs are that Hammond will be reluctant to put extra cash on the table.
The chancellor is under pressure to relax a pay cap on public sector workers and find extra resources to boost police and healthcare budgets.
Some analysts said the bigger-than-expected deficit in June meant the final figure could exceed £60bn before any extra money has been allocated for public services.
Alan Clarke, an economist at Scotia Bank, said it was worrying that the deficit was wider than expected in the early part of the financial year when the last third was already scheduled to see a large deterioration in tax receipts.
Phil Shaw, an economist at Investec, said: “Today’s figures illustrate the challenges confronting the chancellor to manage the public finances, as he is faced with a double whammy of slowing growth and rising inflation on one side and calls for greater expenditure on the other.
“It is now looking likely that the deficit will rise this year for the first time since 2012-13. There are some idiosyncratic factors here and the OBR’s forecasts already envisage extra borrowing. But there are medium-term challenges as well, not least from the ageing population, as the OBR’s recent Fiscal Risk Report highlighted.
“Unless there is a sensible public debate over the UK’s fiscal challenges, the government will face an uphill task in providing a coherent response to deliver sustainable public finances,” he said.
But John Hawksworth, PricewaterhouseCoopers’ chief economist, said the chancellor would still have room for increases in public spending in the budget. “Looking beyond the current financial year, we would expect the decline in the budget deficit to resume if current tax and spending plans are maintained. This should give the chancellor some room for manoeuvre in his autumn budget to ease up on austerity in priority areas like health, social care, policing and housing investment,” he said.
“But he will wish to do this in a measured way given the uncertainties around the economic environment as the Brexit process continues and the high initial level of the public debt to GDP ratio.”
In the first three months of the financial year, the budget deficit widened by 8.9% compared with the same period in 2016 to £22.8bn, according to the Office for National Statistics (ONS).
Spending on debt interest jumped an annual 33% in June to £4.9bn, the highest for any month of June since 2011, reflecting a sharp rise in inflation that has pushed up the cost of index-linked bonds for the government.
The deficit was also widened by higher payments to the EU budget, which have shifted from the usual pattern of contributions to skew annual comparisons, and bigger purchases of goods and services by the government. The EU contribution was £700m higher than in June 2016.
The ONS said income tax and capital gains tax revenues increased by an annual 7.1% to £12.7bn but corporation tax revenues fell by 3.2% on the year to £4.8bn.
