UK budget surplus in July eases headache for Hammond

LONDON (Reuters) - Britain reported its biggest budget surplus for the month of July in 18 years on Tuesday, giving finance minister Philip Hammond some extra room for manoeuvre as he faces pressure to relax his grip on spending later this year.

FILE PHOTO: Britain's Chancellor of the Exchequer Philip Hammond leaves 11 Downing Street in London, Britain, July 2, 2018. REUTERS/Simon Dawson

The surplus, excluding state-controlled banks, stood at 2.0 billion pounds ($2.6 billion), more than double the figure in July last year and well above a median forecast of 1.1 billion pounds in a Reuters poll of economists, official data showed.

The improvement was driven by strong seasonal inflows of income tax, and reduced the deficit for the first four months of the financial year to 12.8 billion pounds, down 40 percent from the same period of last year.

While some of the improvement was due to one-off factors such as the timing of payments to the European Union, economists said the deficit’s steady fall would help Hammond balance calls for more spending in his budget in November with his commitment to continue fixing the public finances.

After years of cuts in real terms to many public services that have angered many voters, Prime Minister Theresa May has already announced a relaxation of the government’s tight grip on public sector pay and more money for the health service.

Britain’s budget deficit last year was 1.9 percent of gross domestic product, its lowest since 2001/02 and down from nearly 10 percent in 2009/10.

Samuel Tombs, an economist with Pantheon Macroeconomics, a consultancy, said Hammond would have room to relax his savings push while meeting his fiscal targets over the next two years.

“Faced with pressure from his own members of parliament to boost his party’s opinion poll standing and the political imperative to show that the economy has prospered after leaving the EU in March 2019, we expect the Chancellor to use this scope to borrow more,” Tombs said.

But with extra money already earmarked for the health service, the scope for any tax cuts was limited, Tombs said.

Britain’s public finances have withstood the shock of the 2016 Brexit vote because the economy has weakened less than many forecasters once predicted.

Income and value-added tax revenues were up 6 percent in the first four months of the financial year, while corporation tax revenues rose by 2 percent.

Government spending, excluding investment, rose by only 1 percent.

Tuesday’s data showed debt, excluding public sector banks and the impact of the Bank of England’s stimulus programme, stood at 1.585 trillion pounds, or 75.2 percent of GDP, in July, the lowest share of economic output since August 2012.

Editing by Mark Potter