U.K. Consumer Slowdown Starts to Squeeze Government Finances

  • VAT income posts its first annual decline in almost five years
  • Deficit narrows to $67 Billion in 2016-17, matching forecasts

U.K. shoppers are reining in their spending in response to faster inflation and it’s starting to take a toll on the public purse.

The latest budget figures from the Office for National Statistics showed value-added tax receipts fell 0.8 percent in the first quarter of 2017 compared with a year earlier. That compares with a 4.1 percent increase in the previous three months and marks the first drop since 2012.

The decline tallies with data last week showing U.K. retail sales fell the most in six years in the three months through March. With prices now rising faster than wages, that’s putting the pinch on workers, who are growing more pessimistic about their financial position and spending capacity.

“The public finances add to evidence that the economy has slowed significantly this year,” said Samuel Tombs, an economist at Pantheon Macroeconomics in London.

Data on Friday is forecast to show that first-quarter economic growth slipped to 0.4 percent from 0.7 percent in the final three months of 2016. That would be the weakest in a year.

For the fiscal year through March, the deficit narrowed to 52 billion pounds ($67 billion), in line with the 51.7 billion pounds forecast by budget officials last month. But the shortfall in March alone widened more than estimated, with key revenue sources such as income tax showing signs of weakness.

While the figures allow Hammond to claim that his deficit-cutting plans remain on track as Britain prepares for a snap general election on June 8, much of the improvement was due to factors that are not expected to be repeated, including an estimated 4 billion-pound dividend-tax windfall. At the same time, accelerating inflation will not only erode the spending power of consumers, but push up debt and welfare costs.

The election, called by Prime Minister Theresa May last week to strengthen her hand in the coming Brexit talks, has thrown Britain’s fiscal plans into confusion.

If the Conservative Party is re-elected, Hammond will need to restate his commitment to erasing the deficit in the next five-year parliamentary term now that the deadline is 2022 rather than 2025. On current projections, Britain will still be borrowing almost 17 billion pounds in 2021-22.

Hammond must also decide how to fill a 2 billion-pound fiscal hole after he bowed to pressure and ditched a tax hike on self-employed workers last month. The chancellor has signaled the Tories will drop a 2015 election pledge not increase income tax, VAT or national insurance, saying he needs more flexibility to manage the economy.

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