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Philip Hammond will have trouble meeting the prime minister’s promise of an extra £20bn a year for healthcare. Photograph: Rex/Shutterstock

Weak UK growth and tax revenues put the squeeze on Hammond

Smaller reduction in June spending deficit will restrict chancellor’s budget plans

WT24 Desk

Weak economic growth and sluggish tax revenues prevented the government from reducing its spending deficit in June by as much as anticipated, squeezing the chancellor’s ability to revive ailing public services in the autumn budget, The Guardian reports

City analysts expected the deficit to decline by more than £1bn compared with June 2017, following a steep fall in interest payments on the government’s total debt bill and a cut in EU budget contributions the Treasury sends to Brussels.

However, those hopes were dashed by a fall in the tax revenue growth that mirrors the weaker state of the economy this year. As a result, the deficit was reduced by £800m year on year.

Closing the deficit at a faster rate would have created more room for Philip Hammond to meet Theresa May’s promise of an extra £20bn a year in public healthcare funding, phased in over the next five years. The chancellor has said he will explain how this will be funded in his autumn budget statement.

However, the fall in public sector net borrowing, excluding public sector banks, to £5.4bn in June from the £6.2bn registered in the same month last year, was a bigger improvement than predicted by official forecasters.

In its gloomy prediction for the coming year, the Office for Budget Responsibility (OBR), the Treasury’s independent forecaster, expects only a marginal improvement in the government spending deficit, mostly in response to the ongoing Brexit negotiations.

Andrew Wishart, a UK economist at Capital Economics, said with borrowing in March, April and June down 25% on the previous year at £16.8bn, the Treasury was on course to cut the annual total to £29.7bn by next March, well below the OBR’s £37.1bn forecast.

He said: “Borrowing still is falling faster than the OBR expected, indicating that the chancellor should be able to change course in the autumn budget and give the economy a break from further spending cuts in 2019.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the trend was likely to revert back to nearer the OBR’s forecast.

He argued that the reduction in borrowing was in part due to lower inflation, which meant lower interest payments on index-linked government bonds, and lower payments to the EU following a fall in GDP growth this year. Both are a signal of a weakening economic outlook that will reduce tax revenues further.

Tax revenue growth fell to only 2.8% in the year to June, down from a forecast 3.6%, despite bumper rises in employment to a new record high this year.

Tombs said Hammond was maintaining his deficit reduction programme largely by sticking to cuts in spending.

“Lower-than-anticipated borrowing, then, reflects the government’s success in controlling expenditure, not a reviving economy,” he said.

“Nonetheless, borrowing still should come in comfortably below the OBR’s forecast this year. Given that the Conservatives now lag Labour in the opinion polls and Brexit must be seen to be a success, we see no reason why the chancellor wouldn’t opt to soften his plans in the budget later this year.

“Accordingly, we’re cautiously optimistic that a neutral fiscal stance will enable the economy to gather a little pace next year, provided a no or hard Brexit is avoided,” he added.

Public debt, excluding the banks nationalised during the financial crisis, stood at £1.792tn, or 85.2% of GDP, down from 86.2% of GDP in June 2017 but double its level before the crisis.

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