U.K. Budget Deficit Unexpectedly Narrows in Boost for Hammond

  • Shortfall shrinks as tax income rises, spending declines
  • Data boost hopes deficit may undershoot forecast this year

The U.K. budget deficit unexpectedly narrowed in August as spending fell and the government recorded healthy receipts of value-added tax, stamp duty and national-insurance contributions.

The shortfall was 5.7 billion pounds ($7.7 billion) compared with 6.9 billion pounds a year earlier, the Office for National Statistics said Thursday. It left the deficit in the first five months of the fiscal year at 28.3 billion pounds, down 0.7 percent on the year.

The figures are a boost for Chancellor of the Exchequer Philip Hammond as he attempts to stick to his budget-cutting strategy in the face of demands to lift public-sector pay after years of austerity.

Special factors are expected to push up borrowing in 2017-18 as a whole but there is a growing consensus that the deficit will come in below the 58 billion pounds predicted by the Office for Budget Responsibility in March.

Revenue rose 3.5 percent last month, with VAT climbing 5.6 percent to its highest level for any August on record despite the squeeze on household incomes from soaring import prices. Stamp duty on property purchases jumped 18 percent and NICs, a social-security levy, rose 5.8 percent.

Self-assessed income tax receipts were adversely affected by timing issues. July 31, the deadline for so-called payments on account, fell on a Sunday in 2016, meaning revenue came in during the following month instead.

As a result, self-assessed receipts fell at an annual rate of 22 percent last month, though combined income in July and August was the highest for the months on record at 9.4 billion pounds.

Spending Restraint

On the spending side, day-to-day expenditure fell 0.6 percent, helping to offset an increase in capital investment. While debt payments fell, they are running 17 percent higher in the fiscal year so far as result of higher inflation pushing up the cost of servicing index-linked government bonds.

The deficit has fallen from 10 percent of GDP in the aftermath of the financial crisis to 2.3 percent last year, and Hammond is pledging to balance the books by 2025. But any shock to the economy from Britain leaving the EU could blow his fiscal plans off course.

There are also questions over how far the government is prepared to relax its seven-year squeeze on public-sector pay. An across-the-board easing could cost billions of pounds that the government might struggle to finance within existing budgets, forcing it to cut spending, raise taxes or borrow more.

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