UK budget deficit widens more than expected as VAT revenues stall

The City of London is seen from Canary Wharf

LONDON (Reuters) – Britain’s budget deficit widened by more than expected at the start of the new financial year as value-added tax revenues flat-lined, reflecting the strain on consumers from rising inflation after the Brexit vote.

The deficit in April stood at 10.4 billion pounds in April, up 13.1 percent compared with the same month last year, the Office for National Statistics said, citing figures that exclude state-controlled banks.

The figure was higher than all forecasts from economists who were polled by Reuters. The median forecast in the poll was for a deficit of 8.9 billion pounds.

Britain has been struggling to fix its public finances since the budget deficit surged to around 10 percent gross domestic product in 2010 after the global financial crisis.

Since then it has fallen steadily to 2.5 percent of GDP in the 2016/17 financial year which ended in March, its smallest since before the global financial crisis.

The ONS said on Tuesday it had revised last year’s shortfall down by 3.3 billion pounds to 48.7 billion pounds.

The deficit is expected to widen again in 2017/18 when finance minister Philip Hammond will have fewer one-off factors to help him than last year.

Hammond might also come under pressure if Britain’s economy slows more sharply than expected this year. Official figures due on Thursday are expected to confirm that the pace of growth more than halved in first three months of 2017 as consumers reined in their spending in the face of higher inflation.

The ONS said value-added tax revenues grew by only 0.2 percent in annual terms in April, the slowest year-on-year increase since August last year, when Britain’s economy was still reeling from the shock of the Brexit referendum.

Income tax revenues rose by just over 1 percent.

However, corporation tax revenues rose by 7 percent in April compared with the same month last year.

The two main political parties contesting the June 8 national election have adopted contrasting stances on how to run the public finances.

Prime Minister Theresa May said last week her Conservative Party would aim to eliminate the deficit by the mid-2020s.

Previously, her finance minister Philip Hammond had said he wanted to get rid of the shortfall as soon as possible after the 2021/22 financial year. Britain’s official budget watchdog has said that would probably take until 2025/26.

By contrast, the opposition Labour Party wants to eliminate the government’s deficit only in day-to-day spending within five years and would exclude investment in infrastructure from its cost-cutting.

Sam Hill, an economist with RBC Capital Markets, has said Labour’s plans suggested the overall deficit could rise to about 4 percent of gross domestic product by 2021/22 compared with the Conservatives’ aim of cutting it to 0.7 percent of GDP by then.

The Office for Budget Responsibility, Britain’s office fiscal watchdog, has estimated it is due to rise to 2.9 percent in the current year before resuming its fall.

Looking further ahead, whoever wins the June 8 election faces the challenge of how to pay for the rising costs of Britain’s aging population.

May last week said she wanted to reduce one growing strain on the public finances by shifting a greater share of the cost of caring for elderly people from taxpayers to homeowners. On Monday, she softened the plan by saying she would make sure there was a limit on the amount people would have to spend.

May has chosen not to repeat the promises made by her predecessor David Cameron not to raise income tax or national insurance contributions.

(Reporting by William Schomberg and Andy Bruce)