UK deficit widens as financing costs rise

Debt costs jumped to £6b as rising prices made servicing indexlinked bonds more expensive

Britain’s fiscal deficit unexpectedly widened as inflation saw debt costs rise to the highest for any October in four years.

Net borrowing was £8 billion (Dh38.8 billion) compared with £7.5 billion a year earlier, the Office for National Statistics said yesterday.

Economists had expected it to narrow to £7.1 billion, the median estimate in a Bloomberg survey showed.

Debt costs jumped to £6 billion as rising prices made servicing index-linked bonds more expensive.

A 25 per cent increase from October 2016 was the most for the month since 2007.

The figures come as Chancellor of the Exchequer Philip Hammond prepared to announce his annual budget yesterday. While the latest snapshot is disappointing, borrowing for 2017-18 as a whole is on course to come in well below the £58 billion officials predicted in March.

In the first seven months, it stood at £38.5 billion, down 9.6 per cent from the same period a year earlier.

The average of independent forecasts is for a deficit of £51 billion in 2017-18. That may be a rare positive in a budget that is expected to see the Office for Budget Responsibility cut its growth forecasts and add more than £30 billion to borrowing in the next four years.

Under pressure

Hammond is under pressure to loosen austerity after the disastrous general election in June but a widely anticipated downgrade to productivity prospects leaves him little room to do so.

Self-imposed fiscal rules require him to reduce structural borrowing to below 2 per cent of national income in 2020-21, with the aim of eliminating the deficit altogether by the mid-2020s.

Spending last month was also pushed higher by net investment, which rose by 26 per cent from a year earlier. On the tax side, growth in VAT was below average and corporation tax receipts were little changed. This was partly offset by the strongest October growth in income-tax revenue since 2007 and an increase in stamp duty on property purchases.

Central government cash borrowing, which determines bond issuance, was in surplus by £6.7 billion in October.

The month traditionally sees a surplus due to the timing of tax payments.

Payments on UK inflationprotected bonds are linked to the retail prices index, which rose 4 per cent in the year through October — the most in almost six years.

Manufacturing orders

UK factories saw orders surge the most in almost three decades this month, helped by export demand.

The Confederation of British Industry said its monthly factory index rose to 17 from minus 2 in October. That’s the highest since August 1988. The measure for export orders also jumped, recording its strongest reading since 1995.

According to the survey, firms expect the pace of output growth to slow over the next three months, but to remain above the long-run average. Data from the UK’s statistics office have also shown momentum in manufacturing, with economists citing the benefits of a pickup in the global economy.