U.K. Budget Deficit Leaves Hammond Little Room for Maneuver

  • September deficit at 10.6 billion pounds higher than forecast
  • Slowing VAT receipts point to Brexit hit to consumer spending

Philip Hammond.

Photographer: Christopher Goodney/Bloomberg

Britain is on course to borrow billions of pounds more than planned this year, leaving Chancellor of the Exchequer Philip Hammond little room for generosity as he prepares new budget plans to help the economy cope with Brexit.

The budget shortfall in the first six months of the fiscal year declined just 5 percent to 45.5 billion pounds ($55.7 billion), a fraction of the pace envisaged before Britain voted to leave the European Union, figures from the Office for National Statistics showed on Friday. In September alone, the deficit widened to 10.6 billion pounds, the highest for the month in two years.

With the Brexit effect forecast to add tens of billions of pounds to borrowing in coming years, Hammond has played down the scale of any fiscal stimulus in his Nov. 23 Autumn Statement. He told lawmakers this week there will be no “splurge” and insisted he intends to return the public finances to surplus, just not by 2020 as his predecessor George Osborne had planned.

“We have already made significant progress in bringing the public finances under control, reducing the deficit by almost two-thirds since 2010, but our debt and deficit remain too high,” Hammond said in a statement released by the Treasury following the latest data. “We remain committed to fiscal discipline and will return the budget to balance over a sensible period of time, in a way that allows us the space to support the economy as needed.”

Follow @Brexit for the latest news, and sign up to our Brexit Bulletin for a daily roundup.

Government revenue rose 2.6 percent in September, lagging behind a 3.5 percent increase in spending. Corporation tax declined 8.7 percent, the first fall for the month since 2008; stamp duty on property purchases dropped 2.8 percent; and value-added tax rose just 1.4 percent, a sign of weakening consumer spending.

Over the third quarter as a whole, VAT rose an annual 1 percent, down from a rate of 3.6 percent in the second quarter, before the Brexit vote.

Out of Reach

Osborne had expected the deficit to fall to 55.5 billion pounds in the current fiscal year, a 27 percent drop on 2015-15, a target that now seems out of reach. It could come in at around 72 billion pounds, according to Howard Archer, an economist at IHS Markit.

“While the economy has shown overall resilience following June’s Brexit vote, there clearly has been some slowdown in activity which is impacting on tax receipts,” he said. “The suspicion has to be that there will be further slippage in the second half of the fiscal year as the economy likely slows and higher gilt yields lift interest payments.”

The yield on 10-year U.K. government bonds has risen 33 basis points this month to 1.08 percent, as the sharp depreciation of the pound since the Brexit vote led investors to shun sterling assets.

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 to 59.2 billion pounds in the first six months, pointing to a significant overshoot of the full-year target of 62.1 billion pounds.

Separately, the ONS said the term-funding scheme announced by the Bank of England in August will be included in the public finances starting in November. The effect will be to increase net debt by the value of the reserves created, which could reach around 100 billion pounds. Debt stood at 1.63 trillion pounds in September, or 83.3 percent of gross domestic product.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE