UK government borrowing hits surprise three-year high

There was an unexpected spike in public borrowing in October, official figures showed on Wednesday, as government spending rose.

The Office for National Statistics said that public sector net borrowing, excluding public sector banks, was £8.82bn, an £1.6bn spike on October 2017 and the highest deficit recorded in October for three years.

It was also well above forecasts; economists had been looking for a deficit of around £6.15bn.

The increase was attributed to a 7.7% jump in government spending during the month, to £65.4bn. The ONS said there had been “notable” expenditure on goods and services as well as benefits.

Central government spending in the period from April to October increased 2.4% year-on-year, exactly in line with the October forecast from the Office for Budget Responsibility, which estimated that spending will rise by 2.4% over the full fiscal year.

Alongside the rise in spending was slowdown in tax receipts, which were up just 1.2% on October 2017 at £59.9bn. The ONS said the improvement was largely down to VAT, income tax and tobacco duties.

In the seven months of the year to date, overall borrowing was £26.7bn – £11.2bn less than the same period in 2017 and the lowest year to date figure for 13 years. The Office of Budget Responsibility is currently forecasting full-year borrowing of £25.5bn, however.

In October, Chancellor of the Exchequer Phillip Hammond declared austerity was coming to an end and pledged to cut taxes and increase public spending. The OBR forecast a 2018/19 Budget deficit of £25.5bn, cut from the £37.1bn deficit that had been expected in March’s spring statement.

The latest PSBR would be somewhat disappointing news for the Chancellor, said Howard Archer, chief economic advisor to the EY ITEM Club, and suggests that Hammond "may struggle" to hit the sharply reduced budget.

But Archer pointed out that the monthly performance can be significantly influenced by the timing of government payments. "Much will depend on how well the economy holds up over the coming months, particularly given amid current heightened uncertainties over whether there will be a Brexit deal."