UK public finances show bigger-than-expected deficit

Commercial property deals are also down, to 9,670. This is a 3.9% fall from the August number and 3.8% below September 2015.

The number of residential property transactions in the UK fell to 93,130 last month, according to seasonally adjusted figures from HMRC. The number is down by 4.3% compared with August, and 11.3% below last September’s figure.

John Hawksworth, chief economist at PricewaterhouseCoopers, says the public borrowing figures were “a bit of a cold shower for the chancellor after the recent run of generally favourable post-referendum economic data”.

It is therefore looking increasingly difficult for the Chancellor to meet the OBR forecast from March that total public borrowing in 2016/17 will be £55.5 billion, which would require borrowing in the second half of the year to come in at just £10 billion. A more likely outcome based on the available data is that the budget deficit this year will come in at around £65-70 billion.

We would not, however, expect the Chancellor to take any immediate action in the Autumn Statement to correct this budget deficit overshoot, as this could be counterproductive and further weaken the economy. Instead we would expect some increase in planned public sector investment over the next few years, allied to a commitment to eliminate the current budget deficit (excluding net investment) before 2020 and to keep the ratio of public sector debt to GDP on a gradual downward path in the medium term.”

Howard Archer, chief European and UK economist at IHS Markit, says of the borrowing figures:

This highlights the fact that the Chancellor has limited room for fiscal stimulus in the Autumn Statement if he is to maintain credible adherence to fiscal discipline. Both the Prime Minister and Chancellor have stressed the need for fiscal responsibility.

The UK’s vote to leave the European Union clearly put the fiscal target for 2016/17 out of reach and the longer-term targets are now clearly off the table as the Theresa May government has acknowledged by abandoning the target of a budget surplus by 2019/20.

Paul Hollingsworth, UK economist at economic consultancy Capital Economics, expects government borrowing to overshoot the OBR’s forecast of £55.5bn for the fiscal year by around £17bn.

The latest outturn puts the public finances well off track to meet the OBR’s March forecast.

Even before the vote to leave the EU, the OBR’s fiscal forecasts were looking optimistic. But the weaker economic prospects over the next few years as a result means that these forecasts are likely to be revised substantially in the Autumn Statement next month.

Indeed, we think the OBR will present the Chancellor with forecasts for borrowing that are about £25bn higher in 2019/20 than the previous forecast. However, this shouldn’t trouble the Chancellor too much. In fact he has already suggested that he will allow an easing of the fiscal squeeze in the near term in order to provide the economy with some support.

Austerity is far from over, but the fact that the economy is now not set to face a significant ramping up of the pace of fiscal consolidation over the next few years is another reason to think that growth won’t slow too sharply.

The bigger September deficit means that borrowing for the first six months of the year is £45.5bn – down nearly 5% from the same period last year, but closer to the £55.5bn forecast by the Office for Budget Responsibility for the entire year.

Hammond has indicated that he will reduce the deficit more slowly than his predecessor George Osborne, to help the economy weather the shock of the Brexit vote in June.

The latest figures, and the likelihood of weaker tax revenues if the economy slows in the wake of the referendum, pile further pressure on the chancellor, as he prepares for his autumn statement on 23 November.

The UK ran a budget deficit of £10.6bn in September, much bigger than expected. This is a major setback for Philip Hammond, the chancellor, ahead of his autumn statement next month.

The budget shortfall was 14.5% higher than in September last year, and wrongfooted City economists who had expected the public finances to improve (to an £8.5bn deficit). Receipts from corporation tax and property transactions both fell in September, compared with a year ago, while VAT receipts grew at a slower pace.

The Office for National Statistics said it was the first fall in corporation tax revenues seen in the month of September since 2009. It was unable to provide a reason. The growth in VAT receipts was the slowest for the month of September since 2012.

The euro remains under pressure, trading at its lowest level against the dollar since March, after Mario Draghi’s comments on quantitative easing yesterday.

As UBS Wealth Management’s Paul Donovan put it:

The first rule of Fight Club is you don’t talk about tapering. The second rule of Fight Club is you DO NOT talk about tapering. The ECB did not talk about tapering. The ECB did not talk about talking about tapering. The ECB will probably taper its quantitative policy.

Back to BAT’s proposed takeover of Reynolds, a $47bn deal.

Guy Ellison, head of UK equities at Investec Wealth & Investment, said:

The timing is a surprise, but the strategic rationale makes perfect sense, pivoting BAT further towards the high value US market, consolidating some strong brands and Reynold’s position in next generation tobacco.

Despite relatively modest synergies, the deal is still seen adding value for shareholders in the first full-year after completion. The ball is now in the court of Reynolds board and shareholders to consider the offer.