Tough decisions for chancellor after income fails to match up to forecasts in month after the Brexit vote

This article is more than 4 years old

This article is more than 4 years old

The government achieved a smaller than expected surplus on the public finances in July, leaving the new chancellor, Philip Hammond, with a tougher balancing act to buoy the post-referendum economy while also bringing down Britain’s deficit.

In the month following the Brexit vote, the government achieved a surplus of £1bn as it earned more in tax income than it spent in a month that is typically lucrative for the public coffers because businesses settle their tax bills. That was lower than a £1.2bn surplus in the same month last year and below economists’ forecasts of£1.6bn in a Reuters poll.

UK government borrowing UK government borrowing.

Economists said the latest figures from the Office for National Statistics were disappointing, and warned the Brexit vote was likely to deal a bigger blow to public finances in the coming months and years.

“Slightly disappointing news for the chancellor, Philip Hammond, as the public finances could only eke out a small surplus in July,” said Howard Archer, the chief UK economist at IHS Global Insight.

“The public finances look poised to take a serious hit from probable significantly weakened economic activity after the Brexit vote taking a toll on tax receipts in particular. It also seems probable that unemployment will rise while any slowdown in the housing market will hit stamp duty receipts.”

Samuel Tombs, of the consultancy Pantheon Macroeconomics, said the “underwhelming surplus leaves the chancellor with little wiggle room”.

“July’s relatively small surplus means that the chancellor will be able to put together only a modest package of measures to support the economy in the autumn statement later this year,” he said.

Still too early to tell how full impact of Brexit vote will play out Read more

But others noted the chancellor’s recent indications that he will not be wedded to near-term targets to get the public finances into a surplus - where the government takes in more than it spends in a year - when the economy is likely to need extra help in the wake of the Brexit vote.

As such, comparisons against earlier borrowing targets and previous forecasts from the fiscal watchdog, the Office for Budget Responsibility, were of limited value, said economists Victoria Clarke and Chris Hare at the bank Investec.

“We expect the autumn statement to move the Treasury on to a looser path to bringing the UK deficit back to surplus, with some action taken to provide a foot up to the economy post-EU vote, including some additional investment spending,” they added.

The July figures showed the surplus was driven by a rise in tax receipts, which were up 3.4% compared with a year earlier, at £61.8bn. Corporation tax receipts rose 8.4% to £7.5bn, while income tax payments rose by 1.9% to £18.9bn.



Central government spending rose by 1.4%, at £58.4bn.

In the current fiscal year starting in April, the government has borrowed £23.7bn, £3bn lower than at the same point last year.

In the year ending March 2016, when George Osborne was chancellor, the deficit was £75.3bn, £16.5bn lower than the year before.

Facebook Twitter Pinterest George Osborne lost his job as chancellor last month. Photograph: Jonathan Brady/PA

David Gauke, the chief secretary to the Treasury, said: “With the public finances in surplus in July, our economy starts from a position of strength to face any economic turbulence following the vote to leave the EU.



“As we keep working to cut the deficit, we are well-placed to handle any challenges and seize the opportunities as our economy adjusts.”

The ONS cautioned that the picture was not entirely clear because it was still collecting data for July.

“Estimates for the latest period always contain a substantial forecast element and so any post-referendum impact may not become clear for some time.”

The Office for Budget Responsibility – the Treasury’s independent forecaster – is likely to revise its forecasts for government borrowing at the time of the autumn statement later this year, taking into account the impact of the Brexit vote.

At the time of the March budget, the OBR was forecasting a full-year deficit of £55.5bn.

Commenting on the July figures, the OBR noted there was still “little firm evidence” on how the referendum result might affect the public finances this year.

Suren Thiru, head of economics at the British Chambers of Commerce, a business lobby group, said fixing the public finances by further reducing the deficit would be “an increasingly uphill task” if economic growth slowed in the coming months.

