Fall in borrowing gives Chancellor a pre-budget boost

● Data also shows that national debt rose to nearly £1.8 trillion – or 88% of GDP

Chancellor Philip Hammond is on track to hit his fiscal targets after rising tax receipts helped government borrowing hit its lowest level for a decade in August.

Figures from the Office for National Statistics (ONS) yesterday showed that public sector net borrowing, excluding state-owned banks, unexpectedly dropped last month by £1.3 billion to £5.7bn, in contrast to last year.

The figure came in shy of economists’ expectations of £6.4bn and marked the lowest net borrowing figure for the month since August 2007.

It means UK government borrowing for the current financial year to date eased back by £200 million to some £28.3bn – also the lowest level for ten years.

The Office for Budget Responsibility (OBR) – Britain’s fiscal referee – has forecast borrowing to come in at £58.3bn for the financial year ending in March 2018.

Prime Minister Theresa May has vowed to deliver a balanced budget by the “middle of the next decade”, knocking back Hammond’s previous target of putting the public finances back in the black by 2020.

The Chancellor faces an increasingly tough challenge to drive down the deficit, as consumer spending is squeezed by high inflation and sluggish wage growth, threatening to drag on the government’s tax income.

However, government tax receipts remained bright in August, rising £1.8bn to £54.6bn, while spending dropped by £100m to £54.8bn.

Howard Archer, chief economic adviser at the EY Item Club, said the result was a boost for the Chancellor ahead of November’s Budget statement.

He said: “Any November wiggle room for the Chancellor will be welcome given that increased public dissatisfaction with austerity and with the public sector pay cap has put pressure on the government to recalibrate fiscal policy.

“Apart from modestly higher public pay increases, the strong suspicion remains that the Chancellor is minded to make limited tweaks to the fiscal approach in November’s Budget rather than radical policy changes.”

Josie Dent, economist at the Centre for Economics and Business Research (CEBR), said: “This positive data are driven by the receipts from self-assessed income tax.

“[We] forecast that public sector net borrowing (excluding public sector banks) will increase to £59.2bn this financial year, £10.5bn higher than last year.

“Economic growth could contribute to limiting the size of this public sector borrowing, since higher profits and pay checks drive up tax receipts. However, CEBR forecast that GDP growth will slow slightly from 1.8 per cent in 2016 to 1.6 per cent this year.”

Focusing on debt, the ONS said public sector net debt, excluding state-owned banks, jumped by £150.9bn to almost £1.8 trillion in August, equivalent to 88 per cent of gross domestic product.