Government borrowing less than predicted putting it on track to undershoot deficit expectations

Jasper Jolly
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A boost for the government ahead of Brexit (Source: Getty)

UK borrowing was less than expected in December, boosting the government as it aims to eradicate the deficit in spending while avoiding an economic hit from Brexit.

Borrowing to fund the deficit fell to £6.9bn in December, according the Office for National Statistics, putting it on track to undershoot the latest forecasts by the Office for Budget Responsibility (OBR). However, the deficit will still be significantly higher than predicted in March, before the vote to leave the EU and the subsequent change in the government's spending plans.

Public sector net debt, which records the total amount owed by government, now stands at 86.2 per cent of the value of GDP. It is expected by the OBR to rise above 90 per cent by the end of the Parliament in 2020.

£3.5bn was used to fund the current budget deficit for everyday government spending, such as public sector salaries. The remaining £3.4bn was used to fund infrastructure investment.

In the financial year to date from April the government spent £63.8bn, £10.6bn less than the equivalent period in 2015. The government’s deficit has been steadily decreasing since 2010 as the Conservatives under David Cameron were elected on a platform of slashing public spending.

Net borrowing to fund the government’s deficit in spending was expected to reach £70.1 in December 2016 according to an average of independent economic forecasts compiled by the Treasury.

Public sector borrowing spiked in November as tax revenues fell short of expectations.

Chancellor Philip Hammond loosened the tighter schedule of deficit reduction set by his predecessor George Osborne. His new “fiscal mandate” allows borrowing to overshoot Osborne’s target by 2.5 per cent of GDP, or £56bn, by the end of the Parliament.

Much of this extra borrowing is being reserved as fiscal “headroom” in case of negative effects on the budget from uncertainty as the UK leaves the EU.

While the prospect of undershooting the OBR's forecasts could give room for Hammond to boost spending or cut taxes in the March budget, the prospect of slower growth could make cutting the deficit harder as tax revenues decrease.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "We continue to think that progress in reducing the budget deficit over coming years will be slower than outlined in the Autumn Statement. The OBR is too optimistic in assuming that GDP growth will slow only modestly this year and that borrowing costs will remain ultra-low for several years.

"As such, we doubt that the Chancellor will be able to use the ‘fiscal headroom’ he expects to have to increase borrowing and still meet his self-imposed rules later in the parliament," he added.

Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said: “The UK’s fiscal position, which was weakened significantly by the financial crisis, is likely to come under increasing pressure in the near-term if UK economic growth weakens as expected.

"A slowing economy would further restrict the UK’s capacity to collect enough tax revenue to consistently achieve deficit reduction in the coming years," he added.

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