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UK public sector borrowing rises but deficit hits Hammond's target

By Oliver Haill

Date: Tuesday 25 Apr 2017

UK public sector borrowing rises but deficit hits Hammond's target

(ShareCast News) - The UK budget deficit met the Chancellor's much reduced target but public sector borrowing rose more than expected in March and is forecast to rise in the coming year.
The Office for National Statistics revealed that public sector net borrowing reached £5.1bn in March which was much bigger than the consensus expectation of £3.1bn and increase of £800m on the £4.3bn borrowing from a year earlier.

Total PSNB, including state interventions in banks, stood at £4.4bn, more than double the £1.5bn consensus forecast and four times the £1.1bn in March last year.

Public sector net debt, the UK's total debt mountain, grew to £1.73trn, equivalent to 86.6% of gross domestic product and up £123.5bn or 3.0 percentage points as a ratio of GDP over the last year.

However the total 2016/17 budget deficit of £52bn did narrow to 2.6% of gross domestic product, versus 3.8% for the previous fiscal year, and so was fairly close to the Office for Budget Responsibility's March forecast of £51.7bn.

Public finances benefited from the resilience of the economy and a strong labour market which lifted tax receipts, with corporation tax receipts reaching a record high of £55.7bn.

VAT receipts were weaker in March as consumer spending began to dip, while total growth in tax receipts slowed to 3.5%, below the 6.2% average of the first eleven months of the fiscal year.

However, much of the annual drop in the budget was due to one-off timing factors including forestalling ahead of the rise in dividend tax in April 2016 and delays in the requests for contributions to the EU budget, pointed out Scott Bowman at Capital Economics.

Accordingly, he estimated borrowing will probably rise by a few billion pounds in 2017-18 as these factors unwind.

"Nonetheless, looking through these temporary factors, fiscal policy is still set to provide a significant drag on GDP growth over the next few years. And we doubt that this stance would be changed significantly in a potential post-election Budget (so long as the Conservatives win a majority)."

Howard Archer at IHS Markit said the budget meeting the markedly lowered fiscal target contained in March's budget was welcome news for Chancellor Philip Hammond.

"This is helpful for the Chancellor's and government's credibility, which is all the more welcome given the looming snap general election," he said.

The OBR expects the deficit to rise to £58.3bn this year, nearly 3% of GDP, as self-assessment tax receipts fall back.

"What's more," said Samuel Tombs at Pantheon Macroeconomics, "this deficit is nearly all structural and will come under upward pressure over the coming years, as the population ages and the government pays the EU's exit bill."

Accordingly he noted that the Conservative party was looking set to water down their prior tax commitments in this election campaign.

"The chance that the Autumn Budget contains net tax rises - like all of the last six post-election Budgets have done - is very high."

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