UK deficit rises steeply after surprise fall in tax receipts

Chancellor under pressure ahead of spending cuts review as higher Whitehall spending and a dip in self-assessment revenue boost deficit

A fall in income tax receipts sent Britain’s deficit spiralling to £12.1bn in August, the widest shortfall in government funding since 2012.

The Office for National Statistics said a dip in corporation tax receipts was also to blame for the worsening situation, which will put pressure on George Osborne ahead of tough expenditure decisions due in November when Whitehall agrees its five-year spending targets.

Dampening the euphoria last month about the first surplus for three years, the deficit represented a big jump on last year’s figure of £10.7bn and much higher than the £9.2bn expected by City analysts.

A fall in self-assessment receipts was behind much of the fall in the Treasury’s tax income after a bumper month of self-employed payments in July.

The ONS said this changing pattern of payments by the self-employed was unexpected as August usually enjoys a large spillover of tax receipts from the previous month.

This year, few extra payments were made in August but the combined receipts for July and August were the highest on record for any July-August period.

Government department spending also rose in August compared with a year earlier, bucking the more usual trend of spending restraint. The combination of higher spending and lower tax receipts meant the cumulative deficit of £38.4bn this financial year is only marginally down on the £42.8bn at the same point last year.

Vicky Redwood, chief UK economist at Capital Economics, said the government was still on track to reduce its anual borrowing, but at a much slower pacer than previously forecast by the Office for Budget Responsibility (OBR).

“Borrowing in the first five months of the fiscal year so far is still below where it was at the same point a year ago. But on the face of it, this leaves borrowing for 2015-16 as a whole set to undershoot last year’s borrowing total of £90bn by only £10bn or so, rather than the £20bn drop that the OBR forecast in its July’s budget.

“That said, we would not read too much into one set of figures, given that the trend had previously improving for several months. Indeed, we expect growth of tax receipts to recover quickly given that the recent strength of the economic recovery should be feeding through,” she added.

The Treasury said: “Britain’s hard work is paying off with cumulative borrowing £4.4bn lower than at this point last year. We have more than halved the deficit but there’s more to do with debt remaining higher than 80% of GDP.”

Osborne is currently negotiating with Whitehall departments to restrain expenditure as part of a comprehensive spending review. Details are expected to be outlined on 25 November as part of the chancellor’s autumn statement.


Phillip Inman Economics correspondent

The GuardianTramp

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