Unexpected borrowing rise in June deals blow to Philip Hammond's deficit reduction plan

Jasper Jolly
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Chancellor Philip Hammond has committed to lowering government debt (Source: Getty)

The government borrowed more money than expected in June, dealing a blow to chancellor Philip Hammond’s deficit-reduction plans.

Public sector net borrowing reached £6.9bn (excluding public sector banks) in June, £2bn higher than the same point last year, according to the Office for National Statistics (ONS). Economists had expected borrowing of just over £4bn during the month.

While monthly borrowing figures can be volatile, the latest update means the financial year-to-date figures are £1.9bn higher than at the equivalent point last year. In the last tax year borrowing hit its lowest level since the financial crisis, when the deficit soared in the face of plummeting recession-hit government revenues.

Cumulative borrowing up year-on-year

Financial year-to-date borrowing is higher than the same point last year (Source: Office for National Statistics)

The figures come as Hammond seeks to defend the government’s plans to continue cutting spending in an effort to balance the books.

The government has come under sustained pressure to increase spending after the Conservatives lost their majority in June’s General Election, with some MPs from within the party arguing for an end to austerity.

Hammond has resisted the calls, sticking to his so-called fiscal rules adopted at last year’s Autumn Statement.

However, there are significant doubts over his ability to meet them. Even well before the election, in March, the independent watchdog the Office for Budget Responsibility (OBR) predicted Hammond will fail in his plan to balance the books by 2025.

Read more: Budget watchdogs warn another crisis would destroy Hammond's deficit plans

Another of Hammond’s targets was to make public sector net debt, the stock of borrowing built up over the years of deficits, fall as a percentage of GDP by the 2020-21 financial year.

The debt pile rose to £1.75 trillion in June, or 87.4 per cent of GDP, a 3.6 percentage point rise over the last year.

Hammond’s plans to cut the debt pile as a proportion of GDP may be hampered if the economy slows during the Brexit process. Some economists believe tighter fiscal policy may be counterproductive in this aim if cutting spending acts as a drag on growth at a time of historically low interest rates. Meanwhile corporation tax is due to fall to 17 per cent by 2020, meaning it is likely hit to revenues, at least in the short term.

Read more: Deficit lower than expected as healthy tax revenues give chancellor a boost

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