The government’s spending deficit is on course to worsen this year after official figures showed that the economic slowdown is beginning to bite on the public finances.
As ministers struggle with demands for higher spending on health, the police and social care, the Office for National Statistics said that public borrowing was narrowly lower in May on the same month last year. Public sector net borrowing excluding the nationalised banks was £6.7bn in May, down from £7.1bn a year earlier and slightly below the consensus expectation of £6.8bn.
But analysts said this still meant the government would fail to meet its previous plan of reducing the deficit in every year of the parliament, with the gap between government income and spending heading towards £58bn compared to last year’s total of £47bn.
The economy has slowed dramatically since the beginning of the year as the prospect of Brexit negotiations unnerved businesses and the higher-valued pound fed through into increased inflation, hitting living standards.
Philip Hammond revised the government’s pledge to bring down the deficit in his autumn statement last year when he set a target for a balanced budget by the middle of the next decade rather than his predecessor’s forecast of 2020.
The Office for Budget Responsibility, the Treasury’s independent forecaster, expects public sector net borrowing to increase this year and then resume its downward path.
Revisions by the ONS to last year’s deficit show it was better than expected at 2.4% of GDP compared with the previous estimate of 2.6%.
Scott Bowman, the UK economist at Capital Economics, said last year’s figures were flattered by a series of one-off sources of revenue and the prospects for 2017/18 were for the deficit to increase for the first time since 2010.
“We still think that borrowing for the fiscal year as a whole will increase by several billion pounds as a number of one-off factors that lowered borrowing in 2016-17 unwind.
“What’s more, the election result suggests that the planned forthcoming fiscal squeeze may be scaled back slightly,” he said.
Yael Selfin, the chief UK economist at the accountancy firm KPMG, said: “Since the Great Recession we have seen a period of gradual improvements, but expected headwinds are now likely to put significant pressure on public finances.
“A slowing economy, a potential hefty exit payment to the EU, and an eventual gradual rise in borrowing costs are all coming the UK’s way. Taken together, this may leave little room for the government to satisfy public demands for an end to austerity.”
A Treasury spokeswoman said: “We have reduced the deficit by three-quarters since 2010, but there is still further to go. We are committed to bringing the public finances back to balance by the middle of the next decade, building a stronger economy that can deliver higher living standards for people across the country.”
Bowman said Hammond’s speech at the Mansion House earlier this week showed that he intends to stick to the fiscal rules set out in the November autumn statement, meaning that “fiscal policy is still set to provide a significant drag on GDP growth over the next few years.”
Ross Campbell, the public sector director at accountants’ body ICAEW, warned that any easing in the government’s austerity should be directed at boosting growth.
“The hung parliament increases the uncertainty associated with Brexit, while also diverting resources and attention away from the economy. This could negatively impact the health of the public finances. As a result, and in order to deliver credible fiscal plans, it’s important that government puts strong financial leadership at the top of its priority list,” he said.
“There have been signals from government that we are likely to see an end to austerity and therefore a possible increase in public spending. With the economy still in a fragile state, it’s important that any increased expenditure is allocated to areas that will help to drive economic growth – infrastructure, training, and fiscal stimulus.”
The fall in borrowing announced on Wednesday was due to an increase in central government revenue of £2.6bn outweighing higher expenditure of £2.2bn. The strong revenue growth partly reflected a 4.3% rise in VAT receipts, though recent shopping trends appear to show this will weaken in the coming months.
The Bank of England said in a separate report that higher food prices were leaving consumers with less money to spend on non-essentials such as furniture and eating out.
Households were also starting to feel the pinch from higher clothing prices and utility bills according to the latest snapshot from the Bank’s team of regional agents, based on discussions with businesses across the UK.
The sharp fall in the pound since the Brexit vote a year ago has driven a rapid rise in the inflation rate, from 0.3% a month before the vote to a four-year high of 2.9% in May.