The UK government deficit widened unexpectedly in August, handing Philip Hammond disappointing news ahead of the autumn budget.
Public sector net borrowing last month, excluding the nationalised banks, grew by £2.4bn to £6.8bn compared with August a year ago, according to the Office for National Statistics.
City economists expected the deficit, which is the gap between government spending and tax receipts, to improve by about £1bn. The figures showed slower-than-forecast growth in tax income of 1.6% compared with a year ago, exacerbated by an increase in spending across government departments of 5.4%.
What is the budget deficit and why does it matter?
The deficit is the shortfall between government income and spending as measured each month by the Office for National Statistics. Tax receipts make up the vast majority of income, while spending on welfare, schools, healthcare and pensions make up most of its outgoings.
Successive governments have racked up deficits since 2000-2001, the last time Britain recorded a budget surplus. The deficit ballooned after the financial crisis as the economy went into recession.
When the government spends more than it receives, this adds to the overall level of the national debt – or the cumulative annual deficits ran over the past several decades. The national debt stood at £1.8tn at the end of October.
The deficit matters because it signals the strength of the government’s control over the public finances, which is important for convincing investors that Britain can pay back the money it borrows. More importantly, the government must pay interest on its debts to the investors it borrows money from such as pension funds, City banks and asset managers. The higher the debt, the more interest the government must pay, potentially cutting funds available for public spending.
The latest snapshot for the health of the public finances comes against a backdrop of steady improvements in recent months helped by relative economic stability, which has driven down the deficit over the course of the 2018-19 financial year to the lowest level for 16 years.
Borrowing in the current financial year-to-date now stands at £17.8bn, almost a third lower than the same period a year ago, and on-track to undershoot the target of £37bn for the fiscal year set by the Office for Budget Responsibility, the government tax and spending watchdog.
Despite the improving picture over the course of the year, the latest figures will likely frustrate the chancellor as he prepares for the autumn budget while considering ways to pay for the £20bn annual increase in NHS spending due by 2023-24 which was promised by Theresa May earlier this year.
The task is complicated by Hammond’s refusal to divert from the Conservatives’ plan to eliminate the deficit by the middle of the next decade, in order to record the first surplus for the public finances since the turn of the millennium in 2001-2.
Economists, however, argue that the chancellor still has wiggle room because he also set a more short-term target of reducing the deficit to below 2% of national income by 2021 – a metric the OBR forecasts he will be able to achieve this financial year.
There are growing calls for Hammond to loosen the purse strings, including from MPs in his own party, after almost a decade of austerity first imposed by the Conservative-Lib Dem coalition in 2010.
The chancellor is however understood to fear the impact a no-deal Brexit could have on the public finances, meaning he may choose to hold on to the spending headroom built-up this year until after Britain leaves the EU.
Hammond is yet to reveal the date of the budget, despite speculation it could come as early as next month, amid growing concern over the government’s ability to reach a Brexit deal with Brussels.
• The subheading of this article was amended on 24 September 2018 to clarify that the government’s NHS pledge is to raise annual spending by £20bn by 2023-24.