Public deficit shrinks further, but Chancellor likely to keep powder dry

The UK public deficit continued to shrink more than expected last month as government spending cuts continued, but the Chancellor's Budget next month is not expected to see many big fiscal giveaways.

September's UK public sector net borrowing excluding stakes in banks was £5.90bn, the lowest September borrowing figure for a decade and below the consensus forecast of £6.5bn.

The total UK public deficit came to £5.33bn versus a £5.7bn consensus forecast, the Office for National Statistics revealed on Friday.

The PSNBex reading for August was revised down to £4.72bn from an initial reading of £5.67bn, while the total PSNB figure was revised down to £4.14bn.

For the first six months of the 2017/18 financial year, the deficit has fallen 7.2% to £32.5bn from the £35.0bn a year ago.

The Office for Budget Responsibility had forecast a 13% rise in borrowing over the fiscal year to March 2018 as a whole to £58.3bn.

Central government current expenditure rose 2.2% year-on-year in September, just half the 4.4% increase anticipated by the OBR for the full year.

Combined with recent downward revisions to last year’s figures, economist Paul Hollingsworth at Capital Econmics said a continuation of the falling deficit trend would for the rest of this fiscal year would bring borrowing in about £16bn below the OBR’s forecast.

"However, it is too soon for the Chancellor to begin loosening the purse strings in response. After all, the OBR expected the deterioration in the public finances to be back-loaded this year, reflecting the unwinding of a number of temporary factors," he said.

"Moreover, it looks set to revise down its assumptions about productivity and the economy’s potential to grow in its November forecasts, which is likely to significantly reduce the room the Chancellor left himself against his fiscal targets.

"As a result, this is likely to constrain the Chancellor’s ability to provide big giveaways in the very near term. However, if we are right in thinking that the economy will perform somewhat better than most others think and that it is too soon to completely give up on productivity, then the Chancellor could have more scope for giveaways or faster deficit reduction further ahead."

Samuel Tombs at Pantheon Macroeconomics said the borrowing continued to reflect the government pushing through more severe cuts to public spending than planned, not surging tax receipts, which increased by just 3.4% year-over-year in September, only a touch above the OBR’s 2.7% full-year expectation and below the 3.8% average of the first five months of the fiscal year.

He agreed that due to a deterioration in the trend toward the end of this fiscal year and the OBR's likely downgrade will mean the Chancellor "is unlikely to soften the existing plans in next month’s Budget enough to prevent the fiscal consolidation from intensifying next year".

"As in March, the Chancellor likely will retain scope to ease the fiscal consolidation in the event of a damaging hard Brexit, rather than ease policy now."