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UK borrowing grows in October, underscoring budget headache for Hammond

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UK borrowing grows in October, underscoring budget headache for Hammond

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LONDON, (Reuters) – – Britain’s budget gap unexpectedly widened last month, underscoring chancellor Philip Hammond’s challenge as he juggles calls for more spending in his budget on Wednesday with the prospect of weaker economic growth ahead. The deficit, excluding state-run banks, stood at 8.0 billion pounds, up 6.9 percent compared with October 2016, the Office for National Statistics said on Tuesday. Rising debt costs, linked to Britain’s higher inflation since the Brexit vote, were a driver of the shortfall. The budget shortfall was bigger than a median forecast of 7.0 billion pounds in a Reuters poll of economists. However, in the first seven months of the financial year, the deficit has fallen by 9.6 percent to 38.5 billion pounds, the ONS said. That still leaves Hammond on target to beat a target of 58.3 billion pounds for the 2017/18 financial year. But his challenge further out looks like it is about to get tougher. Britain’s official budget forecasters are expected to cut their forecasts for economic growth in the coming years because of the country’s stubbornly weak productivity record. Weaker growth would mean lower tax revenues than previously thought. Hammond was quoted as saying on Sunday that the government was heavily constrained fiscally, “but we do have some room” and he said he would seek to speed up house-building in his budget. Prime Minister Theresa May is seeking ways to help voters after she lost her parliamentary majority in an election in June. Many voters say they are tired of seven years of spending cuts in many public services. Britain has been struggling to fix its public finances since the budget deficit surged to around 10 percent of gross domestic product in 2010 after the global financial crisis. Since then it has been cut steadily to 2.3 percent of GDP in the 2016/17 financial year which ended in March, its smallest since before the global financial crisis. Hammond has said he wants to balance the budget by the mid-2020s while at the same time keeping some room for manoeuvre to allow him to spend more if needed to support the economy in the next few years as Britain leaves the European Union. The ONS said on Tuesday that public debt, excluding state-owned banks and the Bank of England’s economic stimulus push, stood at 1.632 trillion pounds in October, equivalent to 79.6 percent of GDP, around double its level before the financial crisis. Hammond said on Sunday that Britain was close to a turning point on bringing the debt-to-GDP ratio down, one of the targets he has set himself. Ratings agency Moody’s downgraded Britain’s credit rating in September, saying the government’s plans to cut its heavy debt load had been knocked off course and Brexit would weigh on the economy. The ONS said debt interest costs jumped by 25 percent in October to 6.0 billion pounds and were up nearly 16 percent in the first seven months of the financial year at 35.4 billion pounds. The increase in October was the biggest for that month since 2007, the ONS said. The higher spending on debt reflected a sharp rise in inflation which has pushed up the cost of index-linked bonds for the government. In November, the Bank of England raised rates for the first time in over 10 years which will also add to the costs of debt for the government in the longer-term. Income tax and capital gains tax revenues rose by nearly 7 percent in October while corporation tax revenues fell by nearly 1 percent.

(Reporting by William Schomberg and Estelle Shirbon)
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