UK posts record budget surplus in January, boosting Hammond before budget update

Business correspondent:::
Britain posted its biggest budget surplus on record in January despite a slowing economy, putting finance minister Philip Hammond on course to announce the lowest annual borrowing since 2002 in a fiscal update due just before Brexit next month.

Britain ran a surplus of £14.895 billion in January, official data showed, the highest since monthly records began in 1993 - and above all economists’ forecasts in a Reuters poll.

The budget deficit looks on track to drop to its lowest since 2001/02 at just over 1 percent of national income this financial year, down from a towering 10 percent just after the global banking crisis in 2009/10.

The public finances have so far withstood the weakest economic growth since 2012 last year, as worries over Britain’s planned exit from the European Union mounted and the global economy slowed.

A 14 percent jump in income and capital gains tax payments in January reflected earnings in 2017/18, when economic growth was stronger.

Economists expect Britain’s independent budget forecasters to predict a rise in borrowing in the coming financial year when Hammond gives his fiscal update on March 13, barely two weeks before Britain is due to leave the EU.

Slower economic growth since Hammond made his full budget statement in October is expected to push up borrowing projections for the next couple of years.

But Hammond is still likely to have around £15 billion of headroom to meet his goal of keeping borrowing in 2020/21 under a self-imposed cap of 2 percent of gross domestic product (GDP), said Samuel Tombs of Pantheon Macroeconomics.

Hammond, under pressure for more public spending after years of austerity, has said he could use that headroom to ease any Brexit shock to the world’s fifth-largest economy.

“With the economic outlook highly uncertain at present, next month’s Spring Statement probably will be a holding operation,” Tombs said.

NO-DEAL BUDGET RISK

A no-deal Brexit would throw all the forecasts out of the window. Prime Minister Theresa May is still struggling to get parliamentary backing for the transition deal she struck with Brussels last year.

On Wednesday, Fitch Ratings said it could cut its double-A credit rating for British government bonds due to the higher risk of Britain crashing chaotically out of the EU.

For now, however, the budget figures look good.

Borrowing in the first 10 months of the 2018/19 financial year came to £21.2 billion, just over half the figure at the same point in the previous tax year. Hammond looks set to meet his goal of limiting borrowing to £25.5 billion.

That said, the Office for Budget Responsibility, which produces the forecasts that underpin Britain’s budgets, said there was “significant uncertainty” about the target.

Britons seemed to be paying income tax earlier this year, accounting for some of January’s revenue surge, it said.

Public debt is also falling as a share of gross domestic product and is at its lowest level since May 2012 - excluding distortions from a temporary Bank of England lending scheme - at 74.0 percent of GDP or £1.597 trillion.

This debt is not unusual for advanced economies, though it is double its share of GDP compared with before the financial crisis, and the finance ministry worries that rising debt would limit its room for manoeuvre in future crises.