Elizabeth Tower, also known as Big Ben, and the Houses of Parliament stand in London, U.K. Photographer: Simon Dawson/Bloomberg  

U.K. Has Smallest December Deficit Since 2000 as VAT Hits Record

(Bloomberg) -- Britain recorded its smallest budget deficit for any December in 17 years as value-added tax receipts reached a record and the Treasury received a bumper credit from the European Union.

Net borrowing narrowed to 2.6 billion pounds ($3.6 billion), well below the median forecast of economists, from 5.1 billion pounds a year earlier, figures showed Tuesday. It left the shortfall in the first nine months of 2017-18 at 50 billion pounds, 12 percent lower than a year earlier.

U.K. Has Smallest December Deficit Since 2000 as VAT Hits Record

The figures leave Chancellor of the Exchequer Philip Hammond on course to keep borrowing in 2017-18 to the 49.9 billion pounds forecast by his budget watchdog in November.

But deficits are predicted to persist well into the next decade as a result of Brexit and poor productivity. The challenge facing Hammond was highlighted on Monday when the International Monetary Fund issued a downbeat assessment of U.K. growth prospects.

In December, Britain received a 1.2 billion-pound credit from the EU relating to amendments to the 2017 budget. It was the largest such payment in at least 20 years and reflected “adjusted member states’ contributions to reflect updated economic forecasts,” the Office for National Statistics said.

VAT, a tax on sales, rose 4.9 percent from a year earlier to an all-time high of 12.3 billion pounds. The public finances were also aided by lower spending on welfare and departmental costs.

Debt Costs

Hammond has benefited from resilient tax revenue but the outcome for the current year hinges on January, a month that usually generates a large surplus as self-assessed income-tax liabilities are settled. Revenue is set to be lower than in January 2017 due to distortions caused by a dividend tax-increase in April 2016.

The public finances are also under strain from rising debt costs as faster inflation makes index-linked bonds more expensive. Government interest payments rose 16 percent between April and December.

Tuesday’s figures cover the first full month since Hammond cut stamp duty for first-time homebuyers in an effort to help young people get onto the property ladder. Stamp-duty revenue fell 0.9 percent from a year earlier, though the ONS said it had no anecdotal evidence of the effect of the relief.

U.K. Has Smallest December Deficit Since 2000 as VAT Hits Record

Hammond bowed to pressure to boost spending on health in his Autumn Budget but critics say much more is needed as the National Health Service struggles to contain a winter crisis that’s led to cancelled operations and left patients waiting in ambulances.

His room for maneuver has been limited by the Office for Budget Responsibility, which sharply reduced its growth outlook in November. Britain will be still be borrowing 35 billion pounds by the end of the decade, instead of the surplus predicted before the June 2016 vote to leave the European Union.

©2018 Bloomberg L.P.