UK public finances improve but fall short of OBR target

UK public sector net borrowing fell in August, but is unlikely to meet government targets for debt reduction set in March's budget.

Excluding public sector banks, PSNB of £10.5bn in August was down £0.9bn on the £11.1bn recorded a year ago, the Office for National Statistics said, versus consensus forecasts of below £10.2bn.

Total PSNB of £10.1bn was smaller than a forecast £10.3m.

For the fiscal year to date, net borrowing shrank by £4.9bn to £33.8bn compared with 2015, with the 13% reduction much smaller than the 23% fall the Office for Budget Responsibility expected to see for the full year.

Economists said the improvement in UK public finances was partly due to one-off timing factors and is unlikely to continue due to the post-Brexit slowdown.

Sam Tombs at Pantheon Macroeconomics said the data showed "the economic slowdown is preventing the Government getting the budget deficit down as quickly as planned in the March Budget".

He noted that the disappointing trend reflected a bigger rise in current expenditure of 4.3% than the 1.9% increase that is expected for the whole year.

"About one-fifth of the rise in spending reflected capital expenditure, which is lumpy from month-to-month. But growth in departmental and welfare spending also was strong, at 2.6% and 4.4% respectively."

Scott Bowman at Capital Economics said, with timing factors boosting self-assessment receipts: "The improvement in the UK public finances in August was partly due to one-off timing factors and is unlikely to continue due to the economic slowdown as a result of the Brexit vote."

He added that due to the lags between activity and receipts, the ONS figure will mainly relate to the pre-referendum economy and so the seeming slowdown in GDP growth since the EU vote will instead hit the public finances in coming months.

With Chancellor Philip Hammond's abandoning of his predecessor's fiscal rule of achieving a surplus in 2019/20 and suggesting a possible increase in discretional spending on road and rail infrastructure, Bowman said it was likely this will flow through to higher borrowing in 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. Accordingly, a softer fiscal squeeze should help to cushion the near-term hit to the economy arising from the Brexit vote."