Deficit creeps down but government spending still higher than expected

Jake Cordell
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Prime Minister Theresa May and chancellor of the exchequer Philip Hammond
The new top team of Theresa May and Philip Hammond have pledged to reset fiscal policy (Source: Getty)

The government was forced to borrow a whopping £10.5bn in August as the aim to reduce the deficit suffers its latest stumble.

The shortfall, which measures the difference between how much the government spends and receives in tax revenues, was down from £11.4bn in the same month last year, but still higher than economists' expectations.

Since the fiscal year kicked off in August, the government has borrowed a total of £33.8bn, down from £38.7bn in 2015/16.

Surprisingly strong consumer spending throughout the summer helped push VAT receipts up by 3.4 per cent while income tax revenues also grew by four per cent.

The figures mark the second consecutive month where the public finances have missed expectations, following a modest £1bn surplus in July - one of the most important months because of the influx of self-assessment tax returns.

The government has abandoned its target to run a budget surplus by the end of the decade in response to the Brexit vote. However, even before the EU referendum the government's own forecasters at the Office for Budget Responsibility (OBR) were only giving the former Chancellor a 50 per cent chance of balancing the books.

The independent OBR said today growth in key tax revenues such as income tax, national insurance and stamp duty "were slower in the first five months of the year" than would be required to meet the government's current borrowing targets.

Economists expect the UK to take considerably longer to eradicate the deficit as growth is set to slow, meaning lower tax revenues, and spending could rise in the wake of the EU referendum.

The Centre for Economics and Business Research (CEBR) said: "The deficit is set to rise rather than fall in the short-term [as] Theresa May and Philip Hammond are set to pull out all the stops to prevent an economic recessison."

Scott Bowman at Capital Economics also noted: "It looks likely that the pace of deficit reduction will be lessened over the coming years. Accordingly, a softer fiscal squeeze should help to cushion the near-term hit to the economy arising from the Brexit vote."

In response to the figures, and the news that the OECD has downgraded its growth forecasts for the UK economy, Hammond said: "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."

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