UK budget deficit falls to decade low but expected to rise this year

UK public borrowing declined more than expected in May, providing encouraging reading for Chancellor Philip Hammond, although the budget deficit is still expected to increase over the rest of the year as the economy weakens.

Public sector net borrowing excluding publicly owned banks reached £6.7bn in May, the lowest May borrowing since 2007 as the public sector spent more money than it received in taxes and other income.

The budget deficit was down from £7.1bn in May last year, a touch below the consensus expectation of £6.8bn and follows the PSNB of £9.4bn in April that was revised down from a previously reported £10.4bn.

The Office for Budget Responsibility expects a £7bn rise in PSNB over the full fiscal year to £58.3bn.

For the 2017 financial year the public defecit was recalculated to £46.6bn versus the previous £48.7bn estimate.

Lower borrowing in May was due to an increase in central government revenue of £2.6bn or 5.1%, boosted by a 4.3% rise in VAT receipts, that offset higher expenditure of £2.2bn, a rise of 4.2%.

May’s figures suggest that the UK public sector finances have made a solid start to the fiscal year, said economist Scott Bowman at Capital Economics, although he doubted this will continue over the rest of the year.

"That said, we wouldn’t read too much into the borrowing figures for the first few months of the fiscal year as they are based on a significant amount of forecast data," he said, forecasting borrowing for the fiscal year will increase as a number of one-off factors that lowered borrowing in 2016-17 unwind.

"What’s more, the election result suggests that the planned forthcoming fiscal squeeze may be scaled back slightly. Nonetheless, with Chancellor Hammond stating in his Mansion House speech that he will stick to the fiscal rules set out in the November Autumn Statement, fiscal policy is still set to provide a significant drag on GDP growth over the next few years."

Howard Archer, chief economic advisor to the EY ITEM Club, said the stronger VAT receipts looked to be the lagged impact of April’s spike in retail sales as a result of the later Easter and warm weather.

He observed that public borrowing amounted to £16.10bn in the first two months of fiscal year 2017/18, which was down fractionally on the £16.17bn shortfall seen in April-May last year but the weakening UK economy is expected to take an increasing toll on the public finances over the coming months

“It is very early on in the fiscal year 2017/18 and not too much should be read into two months’ data as the monthly public finance figures can be volatile and subject to significant revisions," Archer said.

He added: “While the public finances showed fractional improvement in the first two months of 2017/18, they are still in far from healthy shape. Pressure on the government to recalibrate fiscal policy away from austerity is likely to result in limited adjustments to the fiscal approach rather than radical changes in November’s Budget."

Archer felt Hammond commitment to the fiscal rules set out at the Autumn Statement offered "some wiggle room".