Brexit leaves dent in UK public finances for July

The government ran a smaller budget surplus in July than might otherwise have been the case due to the impact of the referendum vote, in turn possibly leaving less room for the Chancellor to provide stimulus, economists said.

The public sector net borrowing requirement, excluding public sector banks, showed a surplus of £1.0bn, down from £1.2bn one year ago, according to the Office for National Statistics.

Economists had been expecting a reading of £1.9bn.

Borrowing fiscal year-to-date came in at £23.7bn, down 11.3% from the same point last year.

However, the year-to-date decline was far less than the 25% drop the Office for Budget Reponsibility had penciled in for the fiscal year as a whole, Paul Hollingsworth, UK economist at Capital Economics pointed out.

Furthermore, July was typically a strong month for the public finances because of one of the four corporation tax payments falling due, together second payments under self-assessment, Hollingsworth said.

"In any case, the new Chancellor Philip Hammond has already laid the groundwork for an alteration of the fiscal plans later this year, noting that fiscal policy could be “reset” at the time of the Autumn Statement. While this doesn’t mean that austerity is over, it looks likely that the pace of deficit reduction will be lessened over the coming years," he added.

"Accordingly, along with looser monetary policy, a softer fiscal squeeze should help to cushion the near-term hit to the economy arising from the Brexit vote."

For his part, Samuel Tombs, chief UK economist at Pantheon Macroeconomics chipped in: "[...] Borrowing therefore is set to overshoot the OBR’s forecast of £55.5B by around £11B. We anticipate an even bigger overshoot, with borrowing coming in around £75B, as the post-referendum slowdown boosts welfare spending and depresses tax receipts. The new Chancellor therefore has little scope to use fiscal policy to stimulate the economy at the Autumn Statement later this year."