(Reuters) - Britain’s budget deficit edged down last month, official data showed on Thursday, boosted by robust income tax revenue and keeping finance minister Philip Hammond broadly on track to meet his new fiscal targets.
Britain’s economy has been slowing this year following June 2016’s vote to leave the European Union, but public finances are typically affected only with a significant lag, and higher inflation boosts some types of tax revenue.
Public sector net borrowing, excluding state-owned banks, fell to £8.7bn last month, the Office for National Statistics said, 1.9% less than the same month last year and slightly below economists’ forecasts in a Reuters poll for it to rise to £8.9bn.
Borrowing since the start of the financial year in April totalled £48.1bn pounds, 6.1% less than in the same period of 2016 and the lowest for this point in the financial year since 2007.
Tax revenues proved resilient
Last month the government’s budget watchdog said it expected borrowing would total £49.9bn ($66.9bn) in the 12 months to the end of March 2018. January typically brings a big surplus in the public finances as annual income tax bills fall due.
Hammond’s new 2017/18 borrowing target is a lot smaller than the £58.3bn shortfall the Office for Budget Responsibility forecast in March 2018, as tax revenues had proven more resilient than expected to a slowdown in the economy caused by the last year’s Brexit vote.
But the Office for Budget Responsibility was much gloomier about the years to come as Britain heads out of the European Union, downgrading its growth forecasts and pencilling in nearly £30bn in extra borrowing over the next four years.
The OBR forecasts borrowing will rise by 9% this year and amount to 2.4% of gross domestic product - its first increase on this basis since the financial crisis began to ravage Britain’s public finance in 2008/09 and ultimately pushed borrowing to almost 10% of annual economic output.
Sharp drop in public sector net debt
Thursday’s figures showed a sharp drop in public sector net debt to £1.575trn or 76.7% of annual economic output, down 3 percentage points on the previous month after public housing associations were reclassified as private-sector bodies.
Economists had previously said this would not reduce underlying weaknesses in Britain’s public finances which have led ratings agencies to downgrade the country’s credit rating.
On Wednesday, the International Monetary Fund said Hammond needed to rein in public borrowing more in order to create room to increase spending if another crisis hits.
Slower economic growth after Brexit also risked wiping out any savings Britain might make on net contributions to the EU’s budget, it added.
Hamond aims to balance the budget by some time in the middle of the next decade.
Austerity drive out of road?
IMF managing director Christine Lagarde said Britain’s government had gone almost as far as it could with curbing public spending in an austerity drive that has lasted since 2010. Instead, she said, it should look at raising taxes - for example on goods and services that have reduced rates of sales tax, and ending tax advantages for self-employed workers.
Last month Hammond scrapped purchase taxes for most first-time homebuyers as the flagship measure of his annual budget. The IMF suggested Britain should reduce taxes on property purchase further, and instead tax the property values instead.
The ONS said revenues from income and capital gains tax were 6.2% higher in November than a year earlier, and 3.4% higher for the year to date. Sales tax revenues were 4.1% higher for the year to date, tracking a broader rise in inflation. Corporation tax revenues were flat.
Spending on debt interest jumped by 15.6% so far this financial year, reflecting a sharp rise in inflation which has pushed up the cost of index-linked bonds for the government.