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Worse than expected government borrowing numbers, a sharp slowdown in private sector activity and a dive in retail sales have underscored the fragile state of the UK economy less than a week before chancellor Rachel Reeves’ tax-raising Budget.
Friday’s report from the Office for National Statistics showed public sector borrowing was £17.4bn last month, compared with expectations of £15bn in a Reuters poll of analysts.
Overall, the Treasury has borrowed £116.8bn for the seven months of the fiscal year to date, nearly £10bn more than the last forecast by the Office for Budget Responsibility.
A separate release from the ONS on Friday showed that British retail sales fell 1.1 per cent in October, much worse than expected.
Ruth Gregory at Capital Economics said the figures, the last big economic releases before the Budget, “paint a pretty grim picture” and noted the risk that “higher taxes in the Budget restrain retail spending over the crucial festive period and going into next year”.
A GfK consumer confidence published earlier on Friday showed a fall of 2 points to minus 19 in October, while business activity barely grew in November, according to the S&P Global/Cips flash UK PMI.
The chancellor is set to increase taxes further in Wednesday’s Budget as she seeks to fill a fiscal hole estimated at between £20bn and £30bn.
After raising taxes by £40bn in last year’s Budget, Reeves had vowed not to return for further increases. But the public finances have since deteriorated in the face of weak growth and high borrowing costs.
Friday’s borrowing data — which also revised September’s figure slightly down to £19.89bn — shows that the public finances remain on an unsteady footing.
About a third of the deficit overshoot in the fiscal year to date stems from higher than expected borrowing by local authorities, the Institute for Fiscal Studies said. Despite high inflation, both VAT and income tax receipts have remained slightly below forecasts.
While warning against over-interpreting monthly fluctuations, the IFS said Friday’s figures “highlight important context for next week’s Budget: uncertainty around tax revenues, pressures on public spending and stubbornly high costs of servicing government debt”.
Economists said the uncertainty around the Budget had also contributed to the fall in retail sales and sharp slowing in private sector activity.
The S&P Global /Cips flash PMI, a measure of the manufacturing and services sector, fell to 50.5 in November, below forecasts of 51.8, and down from 52.2 in October. The reading was just above the 50 mark that indicated businesses are expanding.
Thomas Pugh, chief economist at RSM UK, said that the combination of data pointed to a “clear picture of nervous consumers and businesses reining in activity” ahead of the Budget.
He added that the risk was “growth completely stalls in the last quarter of the year, especially if the Budget goes badly”.
The bigger than expected decline in retail sales in October was the first monthly fall since May, with sales at supermarkets, clothing and mail-order retailers all down.
While some retailers attributed the slide to consumers delaying their spending in the lead-up to Black Friday, Rob Wood at Pantheon Macroeconomics said that “the increasingly chaotic run-up to the Budget has begun to weigh on consumer spending”.
Gilt investors have been on edge as they await details on how Reeves plans to curb borrowing after a late decision to ditch plans to increase income tax.
Gilts gained following the releases, outperforming other major bond markets.
The 10-year yield was down 0.05 percentage points at 4.54 per cent. Yields move inversely to prices. The pound was weaker against the dollar, down 0.1 per cent at $1.306.
The Budget is expected to freeze personal thresholds for longer and cap tax benefits from salary sacrifice schemes, together with measures to raise money from expensive homes and gambling.
Reeves had prepared the ground for an increase in income tax rates before changing course last week.
James Murray, chief secretary to the Treasury, said: “We are set to deliver the largest primary deficit reduction in both the G7 and G20 over the next five years, to get borrowing costs down.”
