Higher borrowing costs and lower tax receipts could deprive Philip Hammond of up to £14bn when he presents his autumn statement next month, denying him vital funds to boost the economy after the Brexit vote, a leading tax and spending thinktank has warned.



The Institute for Fiscal Studies (IFS) said that an unexpected downturn in the public finances in September was likely to be repeated in the next few months and bust the government’s annual borrowing limits set earlier this year.

Thomas Pope, an economist at the IFS, said the Treasury’s room for manoeuvre would be tight after figures for the first six months of the financial year showed tax receipts had failed to match projections by the Office for Budget Responsibility (OBR).

He said: “Borrowing looks set to be higher than the OBR forecast in March, possibly by a reasonable margin. The trend so far suggests that over the year as a whole receipts could undershoot by £14bn.”

Pope said income from other sources could limit the hole in the Treasury’s budget to £8bn, but it could nevertheless act as a brake on plans to support a wide range of infrastructure projects and provide incentives for businesses to invest.

The IFS report followed a collapse in corporation tax receipts to the lowest level since 2009 that helped widen the budget deficit in September to £10.6bn.

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

City analysts, who had expected an £8.5bn shortfall, said the OBR would need to rip up its pre-Brexit vote forecasts after a run of projections from all the major economic institutions showing GDP growth and tax receipts slowing next year.

In recent months Hammond 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.

Hammond said on Friday: “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.”

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 could not offer a reason for the dive in corporation tax receipts.

Paul Hollingsworth, a UK economist at Capital Economics, said if the public finances continued on the current trend, borrowing would overshoot the OBR’s 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.”