UK public sector borrowing fell unexpectedly in June while retail sales grew much more than anticipated, providing welcome news on the health of the economy and public finances.
Net public sector borrowing hit £18.5bn last month, £0.4bn lower than in the same month in 2022 and below analyst expectations of £22bn, according to data published by the Office for National Statistics on Friday.
The ONS put the fall down to higher tax receipts and a substantial drop in the interest payable on government debt.
A separate ONS release showed that the volume of British retail sales grew by 0.7 per cent between May and June, far more than the 0.2 per cent forecast by economists polled by Reuters, and came after increased sales in the previous two months.
In the three months to June, public sector borrowing was £54.4bn — £7.5bn less than forecast by the Office for Budget Responsibility, the fiscal watchdog. The undershoot was helped by large downward revisions to the April-to-May figures thanks to higher tax receipts.
Martin Beck, chief economic adviser to consultancy EY Item Club, said substantial historical revisions and the surprise drop in borrowing in June “have left the public finances looking in a healthier position than previously thought”.
The figures will bring “some cheer for the government on a day when it has lost two by-elections”, said Ruth Gregory, economist at Capital Economics.
Despite the positive news, chancellor Jeremy Hunt said: “Now more than ever we need to maintain discipline with the public finances. We are at a crucial juncture and need to avoid reckless spending.”
The chancellor ruled out big pre-election tax cuts in a recent interview with the Financial Times.
Even with the fall in borrowing, government expenditure rose by £5.2bn to £96.7bn in June compared with the same month last year. This was £2.3bn higher than forecast by the OBR, and was fuelled by the cost of energy support schemes and increased benefit payments.
However, tax receipts for the month rose to £57.3bn — £4.6bn more than in the same month last year, driven by increases in income tax, corporation tax and VAT receipts. The strong tax receipts reflected “brisk growth in nominal GDP and wages”, explained Samuel Tombs, economist at Pantheon Macroeconomics.
The finances were also boosted by a drop in the interest payable on central government debt, which was £12.5bn in June, £7.5bn lower than the record £20bn in June 2022. This reflected slower increases in the retail price index to which a large proportion of gilts are linked.
Despite the improvement, most economists warned that there was limited room for tax cuts ahead of the general election expected next year as public debt, or borrowing accumulated over time, was estimated to be 101 per cent of GDP — the highest since the early 1960s.
You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.
With interest rates still rising and a recession on its way, “hopes that the chancellor will have room to fund a big package of net tax cuts in the Autumn Statement without breaking his fiscal rules will probably be disappointed”, said Gregory.
Meanwhile, the strong uplift in retail sales was helped by the warm weather and the rebound in food spending after consumers shifted to takeaway and dining out for the extra bank holiday in May.
You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.
ONS chief economist Grant Fitzner said: “Retail sales grew strongly, with food sales bouncing back from the effects of the extra bank holiday, partly helped by good weather and department stores and furniture shops also having a strong month.”
The volume of sales at food retailers was up 0.7 per cent, bouncing back after a 0.4 per cent fall in May, with some supermarkets attributing the boost to good weather and promotions. Sales at department stores were up 1.9 per cent over the month. Retailers put the increase down to summer sales and higher footfall due to the weather.
The impact of high inflation was still visible, however; consumers spent about 18 per cent more in June than in February 2020, before the pandemic, but bought 0.2 per cent less by volume.
Separate data by the research company GfK reported a sharp fall in consumer confidence in July. However, Beck said that retailers’ better performance “increases the likelihood that the economy managed to grow in the quarter”.
Source: Economy - ft.com
