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Income Tax Boost Shrinks August Budget Deficit, but 2019 Set to See Budget Deficit Rise Again

HM Treasury

Image © Gov.uk

Government net borrowing in August 2019 stood at £6.4BN, below analyst expectations for borrowing to come in at £6.60BN, and £0.5BN less than in August 2018.

Driving the improvement in the budget deficit was a pick-up in self-assessment income tax receipts which stood at £1.7BN, which is an increase of £0.4BN on August 2018 according to the latest ONS data on UK finances.

This is the highest level of August self-assessed Income Tax receipts since 2009.

Overall, government receipts in August 2019 increased by £1.9BN (or 3.4%), when compared with August 2018, to £59.2 billion.

UK budget deficit

While the country reported a smaller-than-forecast deficit for the month, the improvement was not enough to ensure that 2019 will likely be a year in which the ongoing improvement in the country's finances turned.

Indeed, data from the ONS shows borrowing in the financial year to date rose by 28%.

Interest payments on the government’s outstanding debt decreased by £0.9BN when compared with August 2018,

The net cash requirement of the central government stood at £18.1BN in the current financial year-to-date which is an increase of £13.7BN on the same period last year. The public sector net cash requirement represents the cash needed to be raised from the financial markets over a period of time to finance the government’s activities.

At the end of August 2019, the amount of money owed by the government to the private sector stood at just below £1.8 trillion, which equates to 80.9% of the country's GDP.

Debt levels

There were significant changes to how UK public debt is measured in today's release.

This is largely based on the implementation of a number of changes to the methodology behind the figures, which pushed up borrowing last year by £17.8bn, from £23.6BN (1.1% of GDP) to £41.3BN (1.9%).

The largest part of this was the change to how student loans are counted, accounting for £12.4BN of the rise.

"The ONS now treats a portion of student loans as spending rather than lending, reflecting the fact that much student debt is never repaid, and instead is eventually written off," says Andrew Wishart, UK Economist at Capital Economics.

Economists are in agreement the Treasury will miss its fiscal target.

The expected deterioration in the UK's fiscal position comes after the new Chancellor of the Exchequer Sajid Javid Sajid Javid promised on September 04 that the Johnson administration would oversee the largest increase in public spending in more than 15 years, as he outlined a £13.8BN package ahead of a possible general election.

Announcing departmental budgets for next year, the chancellor committed the government to a 4.1% increase in expenditure from 2019-20 to 2020-21, as the Conservative Party looks to put its austere credentials behind it.

"Alongside the further increase in 2020/21 announced in the Spending Round, the change to how student loans are treated in the public finances statistics and high government spending in the year-to-date means it will be difficult for the government to meet its fiscal target. No doubt the Chancellor will alter the target to allow him to support the economy with fiscal stimulus, but the big picture is that following 6 years of the deficit falling, it is now on the rise again," says Wishart.

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