Britain’s budget deficit rose to the highest October level for three years, handing Philip Hammond disappointing news soon after his budget “gamble” on the future strength of the public finances.
The first snapshot since last month’s autumn budget revealed that public sector net borrowing, excluding the nationalised banks, grew by £1.6n to £8.8bn compared with October a year ago, according to the Office for National Statistics.
City economists had forecast a reading of £6.2bn in a Reuters poll. The outcome marks the worst October for the public finances since 2015.
Although tax receipts continued to grow compared with the same month a year ago, government spending increased by more. Analysts said the increase in the budget deficit – the shortfall between tax receipts and government spending – was most likely down to higher departmental spending.
The latest snapshot comes after the chancellor ramped up spending at the budget last month, mainly to cover the £20bn of additional funds promised for the NHS by 2023-24, while also handing out tax cuts that benefit the richest in society most.
Hammond did so after the Office for Budget Responsibility forecast the budget deficit would be about £12bn lower this year than it had previously thought, after months of stronger than expected readings for the public finances.
He was however criticised the day after the budget by the Institute for Fiscal Studies for taking a gamble that the public finances would maintain the improvement seen earlier this year, with a warning that the better short-term news for the government’s coffers might quickly evaporate.
Should the latest deterioration in the public finances persist, the budget deficit could miss Hammond’s target for this year, causing a potential embarrassment for the government.
John McDonnell, the shadow chancellor, said: “The Conservatives said they would eliminate the deficit by 2015. These figures show austerity has failed in every way.”
With Brexit on the horizon, economists warn of a slowdown for UK growth that could damage the public finances. Hammond has argued that he has sufficient headroom in the public finances to raise spending to stimulate the economy in the event of no-deal Brexit.
Despite the deterioration in the public finances last month, public sector net borrowing for the year so far stands at £26.7bn, down £11.2bn on the same period in 2017-18.
A spokesperson for the Treasury said it was taking a “balanced approach”, which was “getting debt falling while supporting our vital public services, keeping taxes low, and investing in Britain’s future”.
The figures for October showed that higher VAT receipts and takings from income tax and tobacco duties helped increase income, although there were smaller earnings from a transfer of funds from the Bank of England. The rise in receipts of 1.2% compared with a year ago was outstripped by a 7.7% increase in government spending.
Andrew Wishart, the UK economist at the consultancy Capital Economics, said: “This could be a worrying sign for the chancellor. If this trend continues, the giveaways in the October budget could see him breach his near-term fiscal targets.”
Yael Selfin, the chief economist at the accountancy firm KPMG, said the government was already on track to miss the OBR’s new forecast for the budget deficit for the financial year by about £2.6bn.
“This increase in the deficit eats into the projected room that the chancellor saved in case of a damaging Brexit outcome, which we estimate is now diminished to £12.8bn,” she said.
