Britain’s fiscal headache deepens as July deficit tops forecasts

The UK government recorded a larger-than-expected budget deficit of £1.8 billion in July, highlighting the fiscal challenges facing Chancellor John Healey as he prepares his first budget.

Economists had expected the government to post no deficit in July, a month that typically benefits from higher Treasury receipts due to self-assessment income tax payments, The Guardian reports.

Self-assessment tax receipts reached £17.1 billion in July, up £1.7 billion from the same month a year earlier. However, the Office for National Statistics (ONS) said the government still recorded a deficit as “spending growth outpaced receipts.”

The cumulative deficit for the first four months of the financial year stood at £56.7 billion. Although this was lower than the figure recorded during the same period last year, it was £2.3 billion higher than the forecast by the Office for Budget Responsibility.

Healey is due to deliver his budget on October 28, with the UK’s public finances expected to be weaker than projected in the government’s March spring statement.

At the time, the government had a £23.6 billion buffer against its fiscal rules. Analysts now expect a significant portion of that headroom to be eroded by higher inflation, weaker economic growth and rising government bond yields.

Recent movements in global bond markets have pushed the yield on UK government bonds above 5%, increasing borrowing costs for the government.

Martin Beck, chief economist at consultancy WPI Strategy, said: “Ten-year gilt yields are above 5%, reflecting energy-related inflation concerns, and these will gradually feed through into a larger debt-interest bill as existing debt is refinanced. At the same time, the government faces pressure to loosen inherited spending plans, meet unfunded defence commitments and deliver on its own ambitions for housing, infrastructure and public services.”

The ONS reported that total public debt reached £2.98 trillion in July, equivalent to 94% of GDP and £96 billion higher than a year earlier. The increase is in line with Labour’s plans to borrow for infrastructure investment.

Responding to the figures, Healey said: “Fiscal discipline is the bedrock of our UK economic stability and national security, which is why we are committed to meeting our fiscal rules, with a buffer against global uncertainties.”

He added: “We are cutting the deficit faster than any other G7 economy, while giving people a bit of breathing space with cost of living pressures and focusing support to get young people into work.”

Healey will also need to secure an additional £1.2 billion a year to finance the government’s defence investment plan.

Meanwhile, there were signs that economic activity strengthened in August. A survey by S&P Global showed UK private-sector output expanding at its fastest pace since April, driven primarily by the services sector.

The survey indicated that the UK economy could grow by around 0.3% in the third quarter.

By Vafa Guliyeva