UK budget 2017: pain looms for Philip Hammond despite big drop in borrowing

Plunging borrowing gave Chancellor Philip Hammond a much-needed boost today ahead of a Budget likely to deliver a damning verdict on long-term prospects for the public finances.

Latest official figures showed borrowing fell by a much bigger than expected £700 million to £5.9 billion last month — the best September for the public finances since 2007.

For the year to date, the deficit is £2.5 billion lower than last year at £32.5 billion — prompting predictions that Hammond could undershoot the Office for Budget Responsibility’s £58.3 billion borrowing forecast by at least £10 billion.

The figures show tax receipts up 3.4% on last year, and spending by the Government is only 2.2% ahead of a year earlier. Higher inflation has boosted the Government’s cash tax take — as raised prices result in more VAT — and takings have been flattered by early income tax payments to avoid last year’s dividend tax.

But the real blow to the public finances is from the OBR which is preparing to cut estimates for the UK’s productive potential. That will hammer the Government’s tax forecasts and increase the deficit, putting Hammond’s ambitions to balance the books by the middle of the next Parliament in jeopardy.

John Hawksworth, chief economist at PwC, said the OBR’s review was the “fly in the ointment”. “The net impact of these forecast changes is likely to be higher-projected borrowing. This could more than offset the likely undershoot this year, so reducing the Chancellor’s fiscal wriggle room in the Budget.

“We would still expect the Chancellor to find some extra money for priorities like housing and the NHS, but any giveaways are likely to be offset to a significant degree by fiscal takebacks.”