Pressure Mounting on U.K. Budget Deficit as Growth Slows

Updated on
  • U.K. fiscal deficit is falling more slowly than forecast
  • Growth in VAT receipts slows to 2% in months since referendum

The U.K. fiscal deficit is declining more slowly than the government forecast as pressure builds on the public finances following the decision to leave the European Union.

The budget shortfall stood at 33.8 billion pounds ($44 billion) in the first five months of the 2016-17 fiscal year, down 13 percent from a year earlier, the office for National Statistics said on Wednesday. The deficit for August alone was 10.5 billion pounds, slightly higher than economists forecast.

Back in March, the Office for Budget Responsibility saw the deficit falling by more than a quarter in each of the following two years. Those predictions were made three months before the Brexit vote and they are almost certain to be revised when Chancellor of the Exchequer Philip Hammond announces his Autumn Statement on Nov. 23.

While the post-referendum economy is faring better than many had expected, a significant slowdown appears to be under way, threatening to erode tax revenue and push up spending on welfare. The downturn could add 20 billion pounds a year to borrowing over the next five years, Bank of America Merrill Lynch estimates.

In addition, Hammond has hinted he’ll announce a limited fiscal giveaway to support the monetary stimulus unleashed by the Bank of England in August.

VAT Slowdown

The ONS said there had been “no major observable effect” on the public finances from the Brexit vote. Still, the latest figures showed possible signs of a slowdown in consumer spending, with value-added tax -- a levy on on sales -- rising just 2 percent in July and August from a year earlier. That compares with growth of almost 5 percent in May and June, before the Brexit vote.

“Shifts in the growth rate of that order are not unusual because receipts are volatile, but it’s an indicator worth watching,” said Jamie Murray, a Bloomberg Intelligence economist in London.

Overall government revenue rose 7.1 percent in August on the year, boosted by a sharp rise in self-assessed income-tax receipts and higher corporation tax. Government spending climbed 4.3 percent.

The deficit in the 2015-16 fiscal year was revised up by 1.2 billion pounds to 76.5 billion pounds, or 4.1 percent of GDP. In March, the OBR forecast the deficit would fall to 55.5 billion pounds in the current fiscal year and 38.8 billion pounds in 2017-18.

Higher-than-forecast borrowing means the government may need to add to the 131.5 billion pounds of gilts it plans to sell this fiscal year. 

The cash measure used to calculate how much the Treasury needs to borrow showed the deficit widening by 19 percent so far this fiscal year to 36.6 billion pounds, almost 60 percent of the shortfall forecast for the full fiscal year.