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UK’s deficit slashed to level last seen before the financial crisis

The Government borrowed £52bn in the last financial year, a fall of £20bn compared to the year before, as the long struggle to eliminate the deficit moved closer towards its goal.

Business Matters
By Business Matters
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That amounts to 2.6 per cent of GDP, the lowest level of borrowing since 2007-08, on the eve of the financial crisis, reports The Telegraph.

But as the UK economy is bigger now, the number is still substantially larger in cash terms – the deficit nine years ago stood at £40.4bn.

That ballooned as the recession struck, spiralling up to £151.7bn in 2009-10 – equivalent to 9.9 per cent of GDP – before slowly falling as the Government has battled to control borrowing.

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The fall in the deficit is bigger than analysts forecast a year ago, before the Brexit vote. The Office for Budget Responsibility had predicted extra borrowing of £55.5bn when it crunched the numbers in March 2016.

Unexpectedly strong economic growth since then has helped to pushed the deficit down.

Corporation tax raked in a record high as businesses paid £55.7bn of tax on their profits, up from £45.7bn in 2015-16.

Business rates raised £26.2bn in the year, up by £25m year on year, while VAT brought in £133.3bn – up from £130.5bn in the previous financial year.

Stamp duty has soared as house prices boomed – and as the tax was increased on both the most expensive homes and on buyers with more than one property. The transaction charge brought in £12.4bn last year, up from £11.3bn the previous year and more than double the £6bn raised in 2010-11.

Pay as you earn income tax brought in another £149.2bn for the Exchequer – up by £3.1bn on the year to hit a new record high – while self-assessment income tax rose by £4.3bn on the year to £28.7bn.

At the same time Government spending increased – total current spending hit a new record high of £685.7bn, up by £6.1bn on the year, while total capital spending fell by £1.4bn to £55.9bn for 2016-17.

The Chancellor, Philip Hammond, loosened the purse strings a touch in his Autumn Statement and his Budget last month which, combined with weaker economic growth forecasts for the years ahead, pushed up predictions of public sector borrowing.

Rather than running a surplus in 2019-20, as former Chancellor George Osborne planned a year ago, the latest OBR forecasts push that expected surplus back into the 2020s.

The pace of deficit reduction may already be slowing, as there are hints that the economic surge may be running out of steam.

Official figures showed weak retail sales in the first three months of the year and that is reflected in the tax numbers.

VAT receipts fell from £35bn in the final three months of 2016 to £32.2bn in the first quarter of 2017, a bigger drop than the usual post-Christmas slowdown.

Income tax in March also fell by 2.8 per cent compared with the same month a year ago.

“The details of March’s numbers offered cause for concern,” said Martin Beck, senior economic advisor to the EY Item Club.

“The steady reduction in public borrowing of recent years may be starting to stutter, but policy implications should be limited.”

The national debt now stands at £1.73 trillion, excluding bank rescues, and £2.05 trillion including the bailouts.

Analysts said the deficit was still a substantial challenge for the next government.

“Whatever the outcome [of the election] on June 8, it’s important to recognise there is still a significant amount of work to be done to repair the public finances – which are projected to stay in deficit for years to come,” said Ross Campbell from the Institute of Chartered Accountants in England and Wales.

“Whoever is Chancellor after the election will need to employ robust fiscal measures to tackle the massive level of public indebtedness we currently see today.

“While Brexit may dominate the pre-election narrative, it is equally important that all party manifestos tackle structural problems that plague the UK’s economy – including the longstanding problems of Government spending more that it earns and a lack of incentives to drive economic growth.”

He suggested that extra investment in infrastructure projects was needed “to spearhead the UK’s economic reboot in a post-Brexit landscape”.

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