UK government deficit falls to lowest since 2007

UK public finances continued to improve in June, with government borrowing falling to its lowest level since 2007 and potentially giving Chancellor Philip Hammond more room for manoeuvre in his autumn Budget.

June’s public deficit fell to £5.4bn from £6.2bn public sector net borrowing a year before, excluding stakes in banks, while the previous two months were also revised down.

The deficit fell as borrowing for the first three months of the financial year hit £16.8bn, the Office for National Statistics revealed, down 24.4% from £22.2bn at the end of June last year and the lowest deficit since 2007.

State finances benefited in June from a 3.1% year-on-year fall in government spendingw, while there was a 1.3% fall in debt interest payments and debt interest payments were down 13% year-on-year over the three months to June.

Including the government's stakes in banks, the total deficit of £4.53bn was larger than the £3.5bn the market expected.

Public sector net debt, excluding banks, was up £33bn over the year to £1.79trn, equivalent to 85.2% of GDP compared to 86.2% of GDP.

Borrowing was falling faster than the Office for Budget Responsibility had expected, which indicated that the Chancellor has room to change course in the Autumn Budget, said economist Samuel Tombs at Pantheon Macroeconomics.

"Borrowing still should come in comfortably below the OBR's forecast this year; we look for borrowing of about £33bn, equal to 1.6% of GDP," he said.

"Since the chancellor's target merely is to reduce cyclically-adjusted borrowing to below 2% of GDP by 2020-21, he has scope to scrap the remaining austerity measures planned for the next two years.

"Given that the Conservatives now lag Labour in the opinion polls and Brexit must be seen to be a success, we see no reason why the chancellor wouldn't opt to soften his plans in the Budget later this year."

Howard Archer, chief economic advisor to the EY ITEM Club, said it was still early days in the fiscal year and there is a long way to go, but the lower April-June deficit ties in with belief that the economy has improved appreciably in the second quarter after a poor first quarter performance which was seemingly only partly due to the severe weather in late-February and March.

"If the pattern of the first three months continued over the full fiscal year, PSNBex would come in at £29.7bn, which is below the £37.1bn shortfall expected.

He added that public finances benefited in June fall in current expenditure, which can be significantly influenced by the timing of payments.

"The Chancellor may have more room for manoeuvre in November’s Budget as he looks to find the extra funding needed for the increased spending promised for the NHS. The Chancellor has previously stated that tax rises will be needed for the extra NHS funding as the government remains committed to bringing down the budget deficit."