Boost for Hammond as budget deficit hits lowest level since 2007

Britain’s budget deficit dropped to the lowest level since before the financial crisis in the last financial year, laying the ground for Philip Hammond to raise government spending on public services later this year.

The Office for National Statistics said public sector net borrowing, excluding the state-owned banks, dropped by £3.5bn to £42.6bn in the last financial year, cutting the budget deficit to the lowest level since the year ending March 2007.

The shortfall between how much the government spends and receives in tax receipts was £2.6bn lower than that forecast by the Office for Budget Responsibility.

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The figures come after the chancellor used the spring statement last month to suggest there could be spending increases in the next budget should the public finances continue to improve over the coming financial year. Hammond has faced sustained pressure from Labour and some MPs in his own party to increase public sector pay after years of austerity. There are also calls to raise spending to soften the blow from Britain leaving the EU.

The OBR forecasts the deficit will fall to £37.1bn this year, around a quarter of what the government borrowed between March 2009 and April 2010 at the peak of the financial crisis.

Hammond seized on the figures on Tuesday, saying: “Thanks to the hard work of the British people, borrowing is the lowest in over a decade. Our economy is at a turning point with debt starting to fall and people’s wages rising, as we build an economy that truly works for everyone.”

The improvement for the government coffers comes despite freezing weather triggering weaker levels of activity in the economy last month, which some economists said could have damaged the public finances. Record high income tax receipts helped to bring down public borrowing.

Stripping out capital spending, the country’s current budget last year was in surplus by £112m, marking the first positive reading since the financial year ending in March 2002. Albeit by a slim margin, on this measure the public finances met the so-called spending “golden rule” set by Gordon Brown when he was chancellor. This called for governments only to borrow to invest in the economy.

John Hakwsworth, the chief economist at the accountancy firm PwC, said the key challenge facing Hammond was how to “trade off growing political pressure to ease austerity against his desire to get the debt ratio down as far as possible before the next economic downturn hits”.

He said: “The undershoot in the deficit this year has given the chancellor a little more wriggle room, but it does not alter the fundamental strategic choice he will need to make in November.”