Why the UK's slim deficit is good news

Britain's budget deficit narrowed last month to its lowest level for any September in the past 10 years, in a boost for embattled finance minister Philip Hammond ahead of next month's annual budget.

September's deficit stood at £5.902 billion ($7.77 billion), down almost 11 per cent from the same month last year, the Office for National Statistics said on Friday, citing figures that exclude state-controlled banks.

The shortfall was much smaller than the median forecast of £6.5 billion revealed in a Reuters poll of economists.

With the first half of the 2017-18 financial year complete, government borrowing is down 7.2 per cent on the same period a year ago, even though the prospect of Britain's departure from the European Union has weighed on the overall economy.

But the strong performance of the public finances so far this financial year probably overstates how much official borrowing forecasts are likely to be revised down next month, the body which compiles the forecasts said on Friday.

Still, the figures will likely cheer Hammond, who has been told his job is at risk by supporters of Britain's departure from the European Union, who think he is too negative and is starving other ministers of funds needed to prepare for Brexit.

"We suspect the Chancellor will find the funds he needs to deal with the most pressing demands, albeit without throwing the task of fiscal consolidation completely out of the window," Victoria Clarke, an economist at Investec, said of the November 22 budget.

For now, tax revenues remain healthy. Receipts from value-added tax on the sale of goods and services, income tax and the stamp duty property tax were higher than a year ago. But corporation tax revenues were down slightly.

Scotiabank economist Alan Clarke warned the second half of the financial year is set to be tougher, given self-assessed income tax receipts around the turn of the year will likely show a deterioration compared with 2016-17.

The finance ministry said on Friday it had made great progress in cutting the budget deficit by over two-thirds since 2010, but borrowing was still too high at over £150 million a day.

Britain paid out £3.7 billion in government debt interest payments, up 11.4 per cent compared with a year ago and pushed up by a rise in inflation. Around a third of British government bonds are linked to inflation.

A move by the Bank of England to raise interest rates in the coming months - something it signalled in September was likely - could push up debt payments further.

Britain has been struggling to fix its public finances since the budget deficit surged to around 10 per cent of gross domestic product in 2010 after the global financial crisis.

Since then it has been cut steadily to 2.3 per cent of GDP in the 2016-17 financial year which ended in March, its smallest since before the global financial crisis.

Source: Khaleej Times