Public finances improve more slowly than expected

Posted on September 21, 2016

The HM Treasury logo sits in display inside the building in Whitehall, in London, U.K., on Wednesday, Oct. 20, 2010. Chancellor of the Exchequer George Osborne and Treasury Chief Secretary Danny Alexander, will detail his plan in Parliament today to virtually eliminate the 156 billion-pound ($245 billion) deficit by 2015. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg

Britain’s public finances are improving much more slowly than expected this year, despite strong tax receipts in August, leaving the government on course to miss its borrowing targets by a large margin. 

Official figures showed that the public sector borrowed £10.5bn in August, down from £11.5bn a year earlier, in line with the average monthly decline for the financial year so far.

    Borrowing has fallen £4.9bn since April, leaving Philip Hammond, the chancellor, in need of a large improvement to achieve the March Budget forecast of a £21bn total drop in borrowing for 2016-17.

    Public sector borrowing has fallen 12.7 per cent so far this year, compared with a forecast decline of 27.4 per cent.

    Most worrying for the chancellor is that although income tax and national insurance receipts were strong in August, tax receipts for the year so far have been significantly less than hoped, suggesting the economy has slowed since the spring.

    Tax revenues are one of the most accurate measures of the growth momentum in the economy because they do not rely on surveys or statistical adjustments to the underlying data. 

    In August, income tax and national insurance revenues were very strong, growing 10.4 per cent on the same month a year earlier, although much of this gain came from recording July’s self-assessment payments in August because the end-of-month deadline fell at the weekend.

    Scott Bowman of Capital Economics said the improvements in receipts were “partly due to timing factors boosting self-assessment receipts . . . [but] this wasn’t enough to put the public finances on track to meet the March forecast”.

    As well as being a good guide to economic momentum, receipts are generally also the best guide to the strength of the public finances because public spending can vary greatly month by month. In the first five months, total central government tax receipts were growing at an annual rate of 4.4 per cent, compared with the Office for Budget Responsibility’s forecast of 6.1 per cent.

    The OBR still expects tax revenue growth to accelerate in the second half of the financial year, with bumper self-assessment revenues in January because of a change to the taxation of dividends.

    The UK economy at a glance

    UK economy at a glance

    The FT’s one-stop overview of the key UK economic data, including GDP, inflation, unemployment, the major business surveys, the public finances and twin deficits and of course house prices.

    However, the required improvement to keep the public finances on track for a surplus in 2019-20, which the government has already said will no longer be achieved, now looks nearly impossible, economists say.

    John Hawksworth, chief economist of PwC, said: “We expect that the OBR will revise up its borrowing projections materially in November.” He added that the Chancellor was unlikely to seek to raise taxes or cut public spending to make up the shortfall, “when the priority is to support the economy in the uncertain period following the Brexit vote”.

    Commenting on the figures, Mr Hammond said the underlying strength of the British economy would help to support growth through the rest of the year.

    “While I recognise that there may be some difficult times ahead, I am confident that we have the tools necessary to support the economy as we adjust to a new relationship with the EU and take advantage of the opportunities that it offers,” he said.

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