UK budget deficit jumps to £6.8bn in June as Brexit pushes up inflation and interest rates

In the first three months of the financial year, the budget deficit widened by 8.9 per cent compared with the same period in 2016

The challenge for the Chancellor: the deficit in June stood at £6.8bn, up 43 per cent compared with last year (Reuters)

Britain’s budget deficit came in wider than expected in June, as higher inflation since the Brexit vote forced the Government to pay more interest on its debt, driving home the challenge facing Chancellor Philip Hammond.

The deficit in June stood at £6.8bn, up 43 per cent compared with the same month last year, the Office for National Statistics said on Friday, citing figures that exclude state-controlled banks.

The shortfall for June was much bigger than a median forecast of £4.8bn in a Reuters poll of economists.

In the first three months of the financial year, the budget deficit widened by 8.9 per cent compared with the same period in 2016 to £22.8bn, the ONS said.

Mr Hammond has come under pressure from within the Conservative Party, as well as from Labour MPs, to loosen his grip on public spending: chiefly, by relaxing a cap on pay for public workers.

Spending on debt interest jumped an annual 33 per cent in June, to £4.9bn – the highest for any month of June since 2011, reflecting a sharp rise in inflation which has pushed up the cost of index-linked bonds for the government.

The deficit was also widened by higher payments to the European Union budget, and bigger purchases of goods and services by the government.

Britain has been struggling to fix its public finances since the budget deficit surged to around 10 per cent of the gross domestic product (GDP) in 2010 after the global financial crisis.

Since then it has been cut steadily to 2.4 per cent of the GDP in the 2016/17 financial year, which ended in March: its smallest since before the financial crisis.

But the deficit is expected to widen again to 2.9 per cent GDP this year, when Hammond will have fewer one-off factors to help him than last year.

He is sticking to his plan to balance the budget by the middle of the next decade – although he has some room for manoeuvre, allowing him to spend more if needed to support the economy as the country leaves the European Union.

The ONS said income tax and capital gains tax revenues increased by an annual 7.1 per cent to £12.7bn, but corporation tax revenues fell by 3.2 per cent on the year, to £4.8bn.

Reuters