Public deficit offers no extra room for Chancellor's Budget
UK public sector net borrowing increased more than expected last month, primarily driven by a surge in interest payments on index-linked gilts due to the rise in inflation.
Public sector net borrowing excluding public sector banks rose to £8.0bn in October, above the £7.5bn in the same month last year and the consensus forecast of £7.1bn.
Total borrowing, known as the public deficit, stood at £7.46bn in October, more than the £6.5bn expected and above the £4.43bn last year.
But low borrowing earlier in the fiscal year means the government has borrowed only £38.5bn since April, £4.1bn lower than in the same months of 2016/17.
Still, the UK's total public debt stood at £1,790bn at the end of October, an increase of £147.8bn over the past 12 months and equating to 87.2% of the value of annual gross domestic product.
Interest payments increased £1.2bn on last year, while public sector investment rose £0.5bn year-over-year, following weakness earlier this year, while growth in tax receipts increased to 5.4% in October, from 4.6% in September and exceeded the Office for Budget Responsibility's 2.7% full-year expectation.
The OBR is likely to be able to revise down its forecast for borrowing this year to about £42bn, said economist Sam Tombs at Pantheon Macroeconomics, reflecting the recent run of good data and the recent £3bn ‘saving’ from the reclassification of housing association as private bodies.
"The OBR, however, will downgrade its forecasts for productivity growth, meaning that its forecasts for borrowing will rise in the latter years of its forecast," Tombs said.
"As a result, the Chancellor’s headroom in meeting his main fiscal target—for cyclically-adjusted borrowing to be below 2% of GDP in 2020/21—will decline, even before he has honoured tax and spending commitments announced by his party since the March Budget.
"In addition, the Chancellor still is strongly incentivised to maintain scope to loosen fiscal policy to engineer an election victory in future or stabilise the economy after Brexit. As a result, Mr. Hammond likely will broadly stick to the existing plans for the fiscal tightening to intensify next year."
Paul Hollingsworth at Capital Economics said he expect the OBR's latest forecasts, announced by the Chancellor alongside his Budget, to show borrowing around £6bn lower this year than previously expected.
"That said, given the expected downward revisions to the OBR’s economic growth forecasts, a pretty poor medium-term outlook for the public finances should therefore restrict the Chancellor’s ability to provide a significant giveaway, if he wants to stick to his fiscal rules. As a result, we expect tomorrow’s Budget to be generally cautious, incorporating a broadly neutral package of tax and spending changes."
Note too that October is an important month for the public finances as it is when many large firms make the second of four payments on their 2017 profits – corporation tax receipts fell by an annual 0.9%. Nonetheless, borrowing for the first half of the fiscal year was revised down by £2bn since the last set of figures. And even taking into account October’s deterioration, cumulative borrowing for the fiscal year-to-date is now 9.6% lower than last year, compared to the 13% rise in borrowing that the OBR expected for the fiscal year as a whole.