Commentary On The Public Sector Finances Release: September 2018

28th October 2018

1. The Office for National Statistics and HM Treasury published their Statistical Bulletin on the September 2018 Public Sector Finances this morning, covering the first half of the 2018-19

fiscal year.

Each month the OBR provides a brief analysis of the data and a comparison with our most recent forecast, currently the March 2018 Economic and fiscal outlook (EFO).

2. Our next EFO forecast will be published alongside the Chancellor's unusually early Autumn Budget on 29 October and it will to a large extent be based on today's data release. Unlike a

typical autumn fiscal event, we will have very little administrative data on central government receipts in October to factor in and no data at all on central government spending.

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3. Public sector net borrowing (PSNB) is provisionally estimated at £4.1 billion in September, down £0.8 billion on a year earlier and £0.4 billion below market expectations. A £1.6 billion rise in central government (CG) spending was more than offset by a £1.7 billion rise in CGreceipts. Borrowing by local authorities was £0.6 billion lower than a year earlier, while borrowing by public corporations was down £0.1 billion.

4. At the time of our March EFO, we forecast that net borrowing would drop from £45.2 billion in 2017-18 to £37.1 billion in 2018-19, a fall of 18 per cent. The ONS's initial outturn estimate for 2017-18, published in April, was £42.6 billion. Since then, in line with the pattern of recent years, it has revised that estimate lower still to £39.8 billion.

5. Borrowing so far this year is estimated at £19.9 billion. This is 35 per cent lower than the latest estimate for the first half of last year, a steeper decline than the 18 per cent we anticipated for the full year back in March - despite the downward revision to last year's deficit.

6. The main factors behind the faster fall in borrowing so far this year include:

• Stronger growth in CG receipts. On a like-for-like basis (excluding APF transfers), CG receipts over the first half of the year are up by 4.4 per cent on a year earlier, relative to our March forecast of a 3.0 per cent rise. PAYE income tax and NICs, VAT and alcohol duties are the main drivers of the strength. As discussed below, cash receipts from corporation tax are also growing more quickly than we forecast for the full year, but this has yet to feed through to the ONS accrued receipts measure. With receipts growth exceeding expectations across most of the major taxes, this raises the possibility that current estimates of nominal GDP growth may in time be revised higher.

• Weaker growth in CG spending. On a like-for-like basis (excluding grants to local authorities), CG spending over the first half of the year is only up by 1.8 per cent on a year earlier, relative to our forecast of a 2.6 per cent rise. That mainly reflects slower growth in departmental current spending (although these data remain very provisional) and lower debt interest payments (following lower RPI inflation earlier in the year).

More often than not, debt interest payments are higher than expected when receipts are higher than expected, with offsetting effects on the deficit, but this year they are both pushing in the direction of lower borrowing than expected.

7. Mechanically extrapolating the percentage change in net borrowing that we have seen so far this year over the full fiscal year would imply a deficit for 2018-19 about £11 billion lower than we forecast in March. But that would not take account of the fact that the recent strength of cash corporation tax receipts has yet to be reflected in the accrued borrowing measure. The implications of both - plus detailed consideration of the specific drivers and timing factors that affect different tax and spending streams - will be reflected in our forecast later this month.

To read more go to - https://obr.uk/docs/dlm_uploads/Oct-2018-Commentary-on-the-Public-Sector-Finances.pdf