September 21, 2018 / 8:39 AM / in a month

Budget deficit jumps in August, but little pressure on Hammond

LONDON (Reuters) - Britain’s budget deficit unexpectedly widened in August, driven by subdued tax receipts, a rise in the state pension and higher EU budget payments, but Chancellor Philip Hammond probably still has room to ease his grip on spending later this year.

FILE PHOTO: Chancellor of the Exchequer Philip Hammond leaves Downing Street in London, September 11, 2018. REUTERS/Toby Melville

The deficit last month stood at 6.753 billion pounds, almost double the median forecast in a Reuters poll and higher than a shortfall of 4.345 billion pounds in August 2017, the Office for National Statistics (ONS) said on Friday.

While this marked the first year-on-year increase in net borrowing for the month of August in three years, the shortfall is unlikely to ring alarm bells for Hammond.

The deficit for the first five months of the current 2018/19 financial year was down 30.5 percent from the same point a year ago at 17.8 billion pounds, helped by a cut in the estimated size of the shortfall in previous months of the year.

Hammond reiterated his focus on cutting Britain’s high debt levels in order to allow him to spend more. “This is good progress but we need to keep up our efforts so we can invest in our public services and our future,” he said on Twitter.

Samuel Tombs, an economist with Pantheon Macroeconomics, said the slowdown in tax receipts in August might make Hammond a little nervous as he prepares his annual autumn budget statement.

But he would probably be able to avoid raising taxes to pay for an increase in spending on the health service promised by Prime Minister Theresa May.

“We expect the chancellor to ease off austerity measures in other areas too, ensuring that fiscal policy doesn’t dampen GDP growth next year” when Britain is due to leave the European Union, Tombs said.

The deficit for August alone was exacerbated by a 0.6 billion pound increase in European Union budget contributions, compared with an unusually small outflow this time a year ago.

The ONS also pointed to a 3.0 percent annual increase in the state pension.

Overall, tax receipts last month edged up by an annual 1.6 percent while spending rose 5.4 percent.

For the April-August period, however, receipts were up 4.0 percent while expenditure was up by only 1.9 percent.

Britain’s economy has slowed as it heads for Brexit in March next year, but not by as much as feared at the time of the 2016 referendum decision to leave the bloc.

Britain’s budget deficit stood at nearly 10 percent of GDP when Hammond’s predecessor, George Osborne, started a multi-year programme of public spending cuts in 2010.

It is expected to fall below 2 percent this year, leading to calls on Hammond from within his Conservative Party to allow more spending.

Public support for increased levels of tax to fund more public spending has hit a 15-year high, the National Centre for Social Research survey showed earlier on Friday.

Editing by Toby Chopra

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