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UK budget deficit narrows as shoppers boost VAT receipts – The Guardian

Britain’s public sector spending deficit dropped to its lowest August total since 2007 after an increase in VAT revenues and a squeeze on local authority borrowing.

The deficit in August stood at £5.7bn, down 18% compared with the same month last year, beating forecasts of £7.1bn in a Reuters poll of economists.

August’s strong performance, after a better than expected July, is likely to be welcomed in the Treasury where the chancellor, Philip Hammond. has come under pressure to relax planned austerity measures and give ground to lobbying for higher public sector pay.

Value-added tax receipts rose 5.6% on the year to £11.6bn in August, the highest for that month on record, and stood 3.1% higher in the April to August period at £56.5bn.

But the boost from VAT made only a modest dent in the shortfall for the financial year since April, leaving the public debt still rising as a proportion of GDP.

The government’s spending deficit for the full financial year is unlikely to beat last year’s drop to 2.3% of GDP. And with GDP growth struggling to get above 1% this year and next, the prospect is that the Treasury will see the overall debt-to-GDP level edge closer to 90%.

Worryingly, the Treasury suffered a fall in its main source of income – income tax – which dropped by £100m in August. National insurance increased by £600m to more than offset the fall in income tax revenue.

Debt interest payments are expected to rise, further narrowing Hammond’s room to increase spending while bringing down the deficit.

John Hawksworth, PwC’s chief economist, said it was encouraging that the gap between government revenues and current spending had fallen relative to last year, as central government receipts increased by 4% compared to an increase in spending of around 3%.

“This suggests that the chancellor should have room for some easing of austerity in his budget in November. This could involve extra money for priorities such as the NHS, social care, housing and infrastructure investment as well as some further relaxation of the public sector pay cap,” he said.

But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said there was no sign of the chancellor easing his grip on government spending. “We doubt the chancellor will ease the fiscal consolidation significantly in the budget on November 22.”

He said the Treasury’s official forecaster, the Office for Budget Responsibility, was likely to revise down its “optimistic forecast” for wage growth and revise up its forecast for debt interest payments in response to the recent jump in the interest bill on government bonds.

“In addition, the chancellor likely will retain scope to ease the fiscal consolidation in the event of a damaging hard Brexit rather than ease policy now,” he said.

UK budget deficit narrows as shoppers boost VAT receipts – The Guardian

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