Shock figure seen as setback for Philip Hammond as he prepares to boost public spending in autumn statement

Britain’s public finances suffered a shock setback in September after a collapse in corporation tax receipts widened the budget deficit to £10.6bn.

A slowdown in the growth of VAT receipts was also blamed for pushing the deficit £1.3bn, or 14.5%, higher than September last year and higher than the £10.5bn recorded in August.



City analysts, who had expected an £8.5bn shortfall, warned that the figures were a setback for Philip Hammond as he prepares to boost public spending in his autumn statement next month. The chancellor is seeking ways to boost growth next year to cushion the economy against a widely expected slowdown following the Brexit vote.

In recent months he has sent conflicting signals about the likely size and scope of extra spending to compensate for the uncertainty surrounding the Brexit negotiations and forecasts of growth for next year that have halved from around 2.2% to nearer 1%.

Immediately after the vote he ripped up George Osborne’s fiscal rule of achieving a budget surplus by the end of the parliament, and talked about the need for extra spending to create jobs and improve the country’s infrastructure.

But he has sought to dampen expectations by emphasising that he is constrained by volatile international money markets, which could drive up the government’s borrowing costs if he is seen to be reckless.



The weak September figures took the budget deficit to £45bn for the first six months of the year, down nearly 5% from the same period in 2015. The Office for National Statistics said it could not offer a reason for the dive in corporation tax receipts.

Paul Hollingsworth, UK economist at Capital Economics, said if the public finances continued on the current trend, then borrowing would overshoot the Office for Budget Responsibility’s (OBR) forecast of £55.5bn for the financial year by about £17bn.



He said: “Even before the vote to leave the EU, the OBR’s fiscal forecasts were looking optimistic. But the weaker economic prospects over the next few years as a result means that these forecasts are likely to be revised substantially in the autumn statement next month.”

Government expenditure since April has been kept in check, rising by £5.9bn or 1.7%, to £348.7bn while tax receipts from the biggest sources of income – income tax and national insurance – increased at a faster pace. National insurance was 7% higher at £59.3bn and income tax rose 2.7% to £78.7bn.

These improvements were undermined when the usually strong September corporation tax receipts proved much weaker, limiting the tax take to £21bn in the first half of the year. The interest bill on the government’s debts caused another headache for the Treasury after it increased by £800m, or 9%.

The OBR said the rise in debt interest payments and a change in the monthly profile of contributions to the EU budget opened up a gap between central government expenditure and income to 4.5% from the first six months last year.

Suren Thiru, head of economics at the British Chambers of Commerce, said the rise in government borrowing underscored the weakness of the UK economy.

“The UK’s ability to generate tax revenue has diminished following the financial crisis, and this underlying weakness is likely to be exacerbated further if the UK economy slows as we predict,” he said, adding it was vital the chancellor offered incentives to “invest, create jobs, and support growth”.

Hammond said: “We have already made significant progress in bringing the public finances under control, reducing the deficit by almost two-thirds since 2010, but our debt and deficit remain too high. We remain committed to fiscal discipline and will return the budget to balance over a sensible period of time, in a way that allows us the space to support the economy as needed.”

• This article was amended on 7 March 2017. An earlier version said incorrectly that corporation tax receipts fell in September to the lowest level since 2009.