Deficit lower than expected as healthy tax revenues give chancellor Philip Hammond a boost

Jasper Jolly
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Philip Hammond has played a more prominent role since the General Election (Source: Getty)

The government received a boost at the start of the financial year as it borrowed slightly less than expected amid healthy tax receipts.

Public sector borrowing in the first two months of the financial year reached £16.1bn, marginally lower than last year, according to the Office for National Statistics (ONS).

Borrowing in May was £6.7bn, £400m less than the equivalent month last year and lower than market expectations, as government receipts (mainly from tax) grew by £2.6bn, a 5.1 per cent jump from May 2016.

Read more: Deficit rises faster than expected in April as tax revenues stall

Meanwhile, the revised-down figures for the last financial year, which ended in March, showed the government borrowed £46.6bn, the lowest since the financial crisis.

The government has run a deficit, meaning it has to borrow to fund services, since 2002, but that borrowing increased massively as tax revenues plummeted during the financial crisis in 2008.

Chancellor Philip Hammond committed to a range of fiscal targets before the General Election was announced. This included a pledge to balance the budget in the next Parliament, but this has since been complicated by the shock loss of a majority by the Conservative party during the General Election a fortnight ago.

That weaker position has undermined the government’s determination to deliver yet more spending cuts, with some politicians, including within the Tory party, saying the result showed the nation is fed up with austerity.

However, the chancellor has remained firmly committed to it, saying last week that the Tory election campaign should have focused on the economy more.

“He faces intense pressure for some relaxation of public spending, not least from the government’s current negotiations with the DUP,” said Philip Shaw, an economist at Investec. “As the chancellor himself put it, he thought that the argument over control of the public finances had been won, but the election showed that it has not.”

John Hawksworth, chief economist at accountant PwC, said the chancellor “still faces some tough challenges ahead if he is to meet his target of a balanced budget by 2025. But his interim target of getting the structural budget deficit below two per cent of GDP by 2020/21 looks much easier to achieve and gives him some room for manoeuvre on tax and spending over the next few years."

Read more: Government borrowing is at its lowest since 2008

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