Budget deficit leaps as Brexit-fuelled inflation gives Hammond a headache | Financial Times

Budget deficit leaps as Brexit-fuelled inflation gives Hammond a headache

Government borrowing rises by more than expected to £6.9bn in June – almost 50% higher than in the same month last year  Philip Hammond ...

Government borrowing rises by more than expected to £6.9bn in June – almost 50% higher than in the same month last year
Philip Hammond
 Philip Hammond faces pressure to loosen his grip on public spending. Photograph: Eddie Keogh/Reuters
The UK borrowed more than expected in June, with the country’s budget deficit rising to £6.9bn – almost 50% higher than the same month last year.
Higher inflation following sterling’s slump after the Brexit vote forced the government to spend more on financing its debt mountain. Other factors included lower GDP growth in the first quarter, a fall in corporation tax receipts and a bigger than expected contribution to the EU budget in June. Analysts said the deficit could now exceed forecasts over the rest of the financial year.
The Treasury said the persistent shortfall in the government’s income compared with spending illustrated the need for a “credible fiscal plan” and that allowed ministers to support “sound public finances” while “promoting a stronger economy”.
But opposition parties were quick to say that the higher deficit showed austerity had failed and delivered 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 ahead of the autumn budget, the early signs are that Philip 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 without any more money being spent on 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.
John Hawksworth, the PwC 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, the Office for National Statistics said.
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.
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Financial Times: Budget deficit leaps as Brexit-fuelled inflation gives Hammond a headache
Budget deficit leaps as Brexit-fuelled inflation gives Hammond a headache
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