January 23, 2018 / 9:37 AM / a month ago

UK public finances boosted by EU credit, surging VAT receipts

LONDON (Reuters) - Britain’s budget deficit fell by much more than expected last month, helped by an unusually large credit from the European Union and the strongest value-added tax receipts on record.

Tuesday’s data will help finance minister Philip Hammond as he tries to cut public debt and prepare the world’s sixth-biggest economy for any shocks as Britain leaves the EU.

However, some ministers are pressing Hammond to relax his grip on spending to counter a resurgent opposition Labour Party.

Foreign Secretary Boris Johnson demanded 5 billion pounds more for the state-funded National Health Service, earning a rebuke from Prime Minister Theresa May.

The Office for National Statistics (ONS) said public sector net borrowing totalled 2.6 billion pounds last month, almost half the borrowing level of December 2016 and about half the level expected in a Reuters poll of economists.

The public finances were helped by a 1.2 billion-pound EU credit, reflecting a cut in the bloc’s overall budget and updated economic forecasts for member states, the ONS said.

Many EU countries grew strongly last year, outperforming Britain and potentially lowering London’s budget contributions.

Borrowing in the first nine months of the financial year fell almost 12 percent to 50 billion pounds, a 10-year low.

That leaves Hammond on course to meet a target of 49.9 billion pounds in the 12 months to the end of March 2018, equivalent to 2.4 percent of gross domestic product, as January figures, when self-declared income tax returns flood in, typically show a budget surplus.

John Hawksworth, an economist at accountants PwC, said Hammond might have a bit more room to spend extra on healthcare when he updates his budget plans on March 13.

“However, we would not expect a major shift in the fiscal stance so soon after his November budget,” he added.

The Office for Budget Responsibility, Britain’s budget watchdog, said the bigger picture was slightly brighter too. “It appears that the underlying improvement in borrowing so far this year is a little faster than would be consistent with our November forecast,” it said.

DEFICIT DOWN

When the Conservative Party took power in 2010, Britain’s budget gap stood at 10 percent of economic output, about four times its current size.

While Britain may do better than expected in cutting the deficit this financial year, the future remains challenging.

The OBR has pencilled in nearly 30 billion pounds in extra borrowing over the next four years, adding to the challenge for Hammond who has said he wants to wipe out the budget deficit altogether by the mid-2020s.

This year’s better finances largely reflect a bigger tax take. Value-added tax receipts in December were the highest on record, up by 4.9 percent to 12.3 billion pounds.

Income and capital gains tax revenues were up nearly 4 percent in the first nine months of the financial year, reflecting continued strong job creation over the period.

Corporation tax revenues recovered from recent weakness to show a rise of nearly 3 percent in the financial year to date.

Writing by William Schomberg; Editing by Ralph Boulton

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