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U.K. Government Borrowing Unexpectedly Falls in March, "Rapid Improvements" in Public Finances seen Ahead say Capital Economics

- UK government borrowed less than economists' expected in March

- Rising tax revenues helped reduce the need for extra borrowing

- Borrowing in the 2017-18 financial year was lower than forecast 

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Latest statistics show UK finances continue to improve and economists believe further improvements in UK financces can be expected over coming months.

The British government did not need to borrow as much as many had been expecting in order to cover its overheads in March, according to official borrowing statistics released by the Office of National Statistics (ONS) on Tuesday morning.

The data showed government borrowing (excluding borrowing by public owned banks) fell by £0.26bn in March compared to February which in turn showed a £0.41bn fall in borrowing, therefore continuing a run of surpluses posted by the exchequer.

The figure beat forecasts that borrowing would increase by £1.1bn in March.

This means public sector net borrowing (excluding public sector banks) decreased by £3.5 billion to £42.6 billion in the latest financial year (April 2017 to March 2018), compared with the previous financial year; this is the lowest net borrowing since the financial year ending March 2007.

The data confirms the continuation of a steady decline in UK borrowing:

UK borrowing continues to fall

"As expected, March’s public finances figures showed that borrowing has come in below the OBR’s forecast for the 2017/18 fiscal year as a whole. And we think that stronger GDP growth will result in a more rapid improvement further ahead," says Ruth Gregory, UK Economist with Capital Economics. "Of course, given the time lags involved, the apparent slowing in the economy so far in 2018 will probably have some adverse impact on the public finances in the coming months. But we expect this slowdown to be temporary so it should not knock the fiscal improvement off course."

Capital Economics think that the Office for Budget Responsibility is being too pessimistic about the prospects for GDP growth in the second half of this year and beyond and therefore the Treasury might be able to best forecasts again.

The current budget - the day-to-day tax and spend account - meanwhile recorded its first full-year surplus since 2001/02.

Despite the improvement in the borrowing picture, it is clear the UK is still subject to an enormous debt mountain that will take many years to clear, despite the improvement in the day-to-day finances:

UK Debt mountain continues to pile up

"Even if we are right in thinking that the OBR’s prognosis for the economy will turn out too gloomy, the key question is whether it changes its tune in time for the Chancellor to provide some giveaways at the Budget in the Autumn," says Gregory.

The Chancellor is meanwhile expected by economists at Pantheon Macroeconomics to snap up any wriggle room the ongoing improvement in public finances granted to him.

"Low borrowing not indicative of a reviving economy," said Samuel Tombs Chief Economist at Pantheon Macroeconomics. "Rapidly falling public borrowing continues to reflect sharp falls in spending, rather than a reviving economy. Lower borrowing in March than last year primarily reflected a £1.0B decline in interest payments and a £1.4B reduction in local authority borrowing. Both these expenditure components are volatile and tell us little about the underlying health of the economy."

We do however note the ONS highlighted that the lower borrowing figure was also as a result of surging tax revenues, which were at the highest on record for a March reading, and the current budget shows a first full-year surplus for the first time since 2001/02.

Pantheon Macroeconomics believe that borrowing likely won’t continue to undershoot the latest fiscal projections while the Chancellor almost certainly will use up most of his “fiscal headroom” - the £15.4B gap between the latest forecast for borrowing in 2020/21 and the 2% of GDP limit imposed by his fiscal rule - in the Autumn Budget.

"More generous commitments on public sector pay increases and NHS spending than factored-in to the fiscal plans already are being made. Some relaxation of the fiscal plans next year, however, should help the economy to regain some of the momentum it has lost over the last year," says Tombs.

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