UK deficit cheer fuels pressure on Chancellor Philip Hammond over pay cap

The public coffers are on track for their best year since the eve of the financial crisis in 2007, piling more pressure on Chancellor Philip Hammond to loosen the purse strings on public sector pay.

In the five months of the financial year so far, the deficit is £28.3 billion — £200 million below the same time last year and the best for 11 years.

In August alone, borrowing fell by £1.3 billion to £5.7 billion, again the best performance for the month since 2007.

So far that leaves the Chancellor well on course to undershoot the Office for Budget Responsibility’s £58.3 billion borrowing target for the financial year overall.

But the data comes two months ahead of a Budget at which the Chancellor faces increasing demands to lift the 1% cap on public sector salaries and end a seven-year period of restraint. Last week, the government showed signs of cracking with pay rises of more than 1% for police and prison officers.

Economists warned the largesse is likely to be limited by the potential effect of Brexit and Hammond’s ambitions to clear the deficit by the middle of the next Parliament.

Howard Archer, of the EY Item Club, said: “While the government has indicated that it will be more flexible on public sector pay, it is still stressing the need for fiscal discipline.”

The picture is also likely to get worse later this year as deficit figures have been flattered by a windfall in self-assessed income tax declared to avoid a big hike in taxes on dividends last year.

In July and August this year HMRC took £9.4 billion in income tax receipts — the highest since records began in 1999. Capital Economics UK economist Paul Hollingsworth said: “If the trend in the public finances seen so far this fiscal year continues, then borrowing would undershoot the OBR’s forecast by £13 billion.”