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Hammond hails economy's 'underlying strength' after borrowing falls

Published 21/07/2016

Public sector net borrowing excluding public sector banks dropped £2.2 billion in June compared with the same month last year
Public sector net borrowing excluding public sector banks dropped £2.2 billion in June compared with the same month last year

Chancellor Philip Hammond said there was "underlying strength" in the British economy as government borrowing fell to its lowest level in June since 2007.

The Office for National Statistics (ONS) said public sector net borrowing excluding public sector banks hit £7.8 billion last month, down £2.2 billion compared to last year and below economists expectations of £9.5 billion.

The ONS said public sector net debt excluding banks climbed by £47.6 billion to £1,620.7 billion over the period, the equivalent to 84% of gross domestic product (GDP).

The lower-than-expected borrowing figures come as a last hurrah for George Osborne who has been ousted as chancellor and seen his target of a budget surplus by 2020 scrapped by new Prime Minister Theresa May.

Mr Hammond said: "These public finance figures highlight the underlying strength of the British economy. Ahead of the referendum monthly borrowing continued to fall, with the deficit in June the lowest it has been since 2007.

"As our economy now adjusts to reflect the referendum decision it is clear we will do so from a position of economic strength."

It means that in the financial year to date, the Government has borrowed £25.6 billion, a fall of more than 8% or £2.3 billion compared with June 2015, the ONS said.

Mr Osborne had been looking to hit forecasts set by the Office for Budget Responsibility (OBR), which said the UK would have a budget surplus of £10.4 billion in 2019/20 and £11 billion the year after.

However, Mr Hammond has indicated that the Government may take advantage of the cheap cost of borrowing to push fresh investment into the UK in the hope of bolstering productivity.

The ONS said the Government's coffers were lifted by a £2 billion rise in receipts to £49 billion in June, compared with the same month last year.

It was helped by an 11% increase in national insurance contributions, while corporation tax rose 4.6% and VAT receipts stepped up by 1.8%.

However, this was swallowed up after a £700 million rise in Government expenditure to £58.5 billion over the period.

Howard Archer, chief UK and European economist at IHS Global Insight, said the figures were a "welcoming present" for Mr Hammond " but things are likely to head downhill as the vote for Brexit takes a toll on economic activity and the public finances".

He added: "The United Kingdom's decision to leave the European Union in June's referendum poses a major threat to the public finances with markedly reduced growth prospects set to take a toll on tax receipts in particular. Consequently, the Government has abandoned the target of a budget surplus in 2019/20.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that despite June's figures, the Government's efforts to repair the public finances have been "disappointingly slow".

He added: "The Government is estimated to have borrowed £75.3 billion in 2015/16, exceeding the OBR's forecast by £3 billion.

"Meanwhile, overshoots in April and May mean that borrowing in the first three months of 2016/17 has been only 8.3% lower than in the previous year. Borrowing therefore is on course to overshoot the OBR's forecast of £55.5 billion by around £14 billion."

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