UK deficit leaves Hammond few options for Brexit budget boost

Britain's public finances showed a slightly bigger-than-expected deficit in August, leaving chancellor of the exchequerPhilip Hammond little room for manoeuvre as he prepares his first post-Brexit vote budget plans.

Britain ran a budget shortfall – excluding state-owned banks – of £10.55 billion (€12.3 billion) last month, lower than a deficit of £11.47 billion in the same month last year.

But economists had expected a deficit of £10 billion, according to the median forecast in a Reuters poll.

There were no clear signs of any major impact on the public finances from June's vote to leave the European Union, the Office for National Statistics (ONS) said.

However, VAT receipts rose at their slowest annual pace since March last year.

Expectations played down

Hammond spoke in July about a possible “reset” of fiscal policy to offset the economic hit from the Brexit vote. But he has since played down expectations that he might announce a surge in public spending when he delivers a half-yearly budget update on November 23rd.

He told politicians earlier this month that he might fund modest infrastructure projects if needed.

The ONS said receipts from income and corporation taxes rose strongly compared with a year ago, although government debt interest payments were also higher, owing to increased payments on inflation-linked bonds.

The increase in income tax receipts was linked to a weaker performance of self-assessment returns in July, which bounced back in August.

For the first five months of the 2016-2017 tax year, public sector net borrowing was nearly 13 per cent lower than between April and August last year at £33.8 billion.

However, Britain’s official budget forecasters had estimated the deficit would narrow to £55.5 billion in the full 2016-2017 financial year – a target which looks out of reach as the economy is expected to slow following the Brexit vote.

‘Unhealthy”’public finances

Hammond has already dropped the target of his predecessor George Osborne of turning the budget deficit into a surplus by 2020 but has said he will tackle Britain's "unhealthy" public finances.

Britain’s budget deficit stood at 4.1 per cent of economic output in the last financial year, down from more than 10 per cent in 2010 but still among the highest for a developed nation.

Before the referendum, Britain’s finance ministry said the economic shock of a vote for Brexit could increase public-sector net borrowing by £24 billion or more in 2017-2018.

However, the immediate shock of the vote appears to have been less severe than many forecasts. Data last week showed no impact on consumer demand and little hit to the labour market in August. Economists say it remains too early to gauge the longer-term effect of the vote.