The UK’s spending deficit fell unexpectedly last month, helped by higher income tax revenues on the back of a flurry of wage rises earlier in the year and a jump in VAT receipts.
The public finances were £18.5bn in the red in June, £400m below the same month last year and below the £22bn shortfall the City had forecast, the Office for National Statistics said.
A reduction in emergency spending on measures to support households and businesses during the cost of living crisis also helped bring down the deficit.
However, across-the-board increases in welfare payments and pensions and the third-highest ever monthly debt interest payment of £12.5bn cut Jeremy Hunt’s wriggle room for his autumn statement this year. Analysts suggested any tax cut before next year’s general election looked unlikely.
Reacting to the monthly figures, Hunt said: “Now more than ever we need to maintain discipline with the public finances.” He pointed to the fall in inflation in June to 7.9% from the previous month’s 8.7% as a sign that the economy was stabilising after a difficult period of rising prices and falling disposable incomes.
The chancellor said: “As this week’s fall in inflation showed, we will start to see results if we stick to our plan to halve inflation, grow the economy and get debt falling.”
ONS figures released last week show that the UK economy shrank by 0.1% in May and many forecasters expect the weak level of growth in gross domestic product (GDP) to continue through the autumn. Data had suggested that the size of the deficit had surpassed the size of entire economy for the first time since 1961.
However, the figures published on Friday revised down the shortfall for May and moved that milestone to June, when debt reached 100.8% of GDP.
Cara Pacitti, a senior economist at the Resolution Foundation thinktank, said the fall in inflation and lower-than-expected borrowing in June were bright spots in a gloomy outlook for the economy.
“The bigger picture is one of the public finances being under severe strain, with net debt hitting 100% of GDP, and the rising cost of servicing debt squeezing out other priorities for spending,” she said.
“The positive borrowing news is unlikely to lead to fresh tax cuts, whatever politicians promise. Whoever wins the next general election is on track to face a tough economic inheritance.”
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A rise in debt payments was blamed on the increasing cost of financing government bonds linked to the retail prices index measure of inflation, which has soared over the past two years. A sharp rise in the lead-up to June last year meant the cost of servicing the UK’s debts hit a record £20bn that month.
Michal Stelmach, a senior economist at KPMG UK, said the rise in debt interest payments last month could be blamed on the government’s energy support schemes and benefit payments, which include the latest disability cost of living payment estimated to have cost about £740m in June.
“Heading into the next general election, the government will be wary that public sector debt has tripled over the past 20 years,” he said.
“While this is not unique to the UK, domestic vulnerabilities … leave the current fiscal position more sensitive to shocks compared with its peers.”
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2023-07-21 10:51:00Z
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