Blow for Hammond as finances take an unexpected dip

The UK's public finances unexpectedly worsened last month, piling further pressure on Chancellor Philip Hammond who is facing a potential growth downgrade in the Autumn Budget.

Tuesday, 21st November 2017, 11:58 am
Updated Tuesday, 12th December 2017, 5:34 am
The development comes as debt interest payments hit a record high of £6bn

The Office for National Statistics (ONS) said public sector net borrowing, stripping out state-owned banks, jumped by £500 million to £8 billion in October.

The move was above economists’ predictions of £7.5bn, as debt interest payments hit a record high of £6bn for the month.

Despite October’s rise, the deficit excluding state-backed banks for the current financial year - April to October - hit the lowest level for a decade, dropping £4.1bn to £38.5bn.

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The update comes as Mr Hammond braces for the prospect of a gloomy fiscal outlook in Wednesday’s Budget, with forecasts expected to show lower economic growth and higher borrowing.

Samuel Tombs, Pantheon Macroeconomics chief UK economist, said: “Public borrowing rose year-over-year in October, despite ongoing austerity measures, primarily because interest payments leapt by £1.2bn.

“Interest payments on index-linked gilts jumped, due to the rise in inflation. Public sector investment also rose £0.5 billion year-over-year, following weakness earlier this year.”

Mr Hammond would have been hoping for a boost going into the Budget following the dismal analysis dished by out Britain’s fiscal watchdog, which has already warned that it will cut its productivity predictions for the next five years.

Such a move would weaken the outlook for the public finances and hamper the UK economy at a time when the Government will be banking on robust economic growth as Britain hurtles towards Brexit.

However, the Chancellor still remains on track to undershoot the Office for Budget Responsibility’s (OBR) current forecast of £58.3bn for the financial year ending in March 2018.

Tax receipts have been bright since the start of the financial year, rising by £16.4bn to £394.3bn between April and October 2017.

However, Government spending has also grown by £11.5bn to £400.6bn, up from £389.1 billion over the same period in 2016.

Howard Archer, EY ITEM Club’s chief economic adviser, said the Budget will not be easy for the Chancellor as he is “squeezed on both sides”.

He said: “Mr Hammond is under pressure to increase levels of Government spending amid public dissatisfaction with austerity and squeezed public sector pay, but he now faces larger deficits over the medium-term due to the OBR downgrading its productivity growth forecasts for the UK and he has to square the circle.

“The Chancellor has indicated that he plans to stick to his fiscal targets.

“Given the major uncertainties facing the economy centred on Brexit, Mr Hammond is reportedly concerned that investor confidence in the UK could be seriously damaged if he abandons the fiscal framework adopted only a year ago.”

The ONS said public sector net debt, excluding state-owned banks, increased by £147.8 billion to £1,790.4 billion in October, equivalent to 87.2% of gross domestic product (GDP).

Sterling showed little reaction to the announcement, up marginally against the US dollar at 1.323 and rising 0.1% versus the euro at 1.128.

Labour’s Shadow Chancellor John McDonnell said: “These figures are a reminder of the continued failure of both Philip Hammond and Theresa May over these past seven years.

“The deficit has still not been eliminated as they promised it would be by 2015, and the national debt continues to grow.