Tax surge boost for the public finances

Soaring VAT payments help take the pressure off government debt as the threat of a bear market recedes

The highest level of VAT receipts since records began meant the public sector paid back much more of its borrowings last month than economists had expected. Gilts initially welcomed the news because the repayment will reduce the number of government bonds in issue but there were also worries that the figures painted a picture of an overheating economy that will require higher interest rates to calm activity.

The pounds 3.875bn repayment in July compared with a pounds 4.64bn deficit in June and a pounds 1.84bn repayment a year ago. It meant the cumulative deficit after four months of the current fiscal year is running at little more than half last year's shortfall. The aggregate deficit of pounds 4.367bn compares with last year's pounds 8.11bn.

There was good news on spending, with departmental outlays up by just 0.2 per cent year on year, suggesting that the restraint seen in the second half of last year continues this time. But most of the good news came on the receipts side, with VAT receipts 32 per cent higher year on year, corporation tax up by 14 per cent and income tax 12 per cent higher, suggesting a limited impact from the introduction of self-assessment for the self- employed.

Although July is normally a favourable month for public sector finances due to large payments of both income and corporation tax, analysts said the number exceeded expectations by some margin. According to David Coleman, economist at CIBC Wood Gundy, the strength was mainly associated with the pick-up in high street spending during the summer as consumers took advantage of windfall payments.

He took a sanguine view of the implications of the figures, adding: "The main consideration for gilt investors should be the improving trend in public finances. It is true that a large part of the falling PSBR is due to the economic cycle, but the latest figures suggest public spending is still subdued."

Jonathan Loynes at HSBC Markets also took heart from the data, which he described as "an excellent set of numbers, which confirm that the public finances are feeling the benefits of the recent acceleration in activity."

He added: "After a disappointing first quarter to the financial year, the PSBR is back on track to meet or even undershoot the official full- year forecast of pounds 13bn."

Geoffrey Dicks, economist at NatWest Markets, also welcomed the figures: "The strength of consumer spending is having a major impact on the cyclical component of the PSBR while public spending restraint is tackling the structural component. Although the markets were expecting a debt repayment this month, its scale has outweighed expectations."

Other economists were, however, less optimistic. Commerzbank economist Chris Barclay said he was surprised to see gilts responding positively to the numbers, given that the major concern for government bonds is how far interest rates may have to climb to quell inflationary pressures.

"Short sterling contracts are suggesting rates are set to peak at 7 or perhaps 7.25 per cent and there is a big risk that this is too optimistic," he added.

Morgan Stanley economist Mark Miller agreed that strong corporation tax receipts and a record VAT contribution were "signs that the pick-up in the economy may harden the monetary outlook for the UK and so have a negative impact".

He warned that the VAT numbers suggest that retail sales data, due to be released tomorrow, could well be strong, boosted in part by the windfall bonuses from building society demutualisations.

Voices
A Russian hunter at the Medved bear-hunting lodge in Siberia
Save the tigerWildlife charities turn to those who kill animals to help save them
News
Davis says: 'My career has been about filling a niche - there were fewer short actors and fewer roles – but now I'm being offered all kinds of things'
PeopleWarwick Davis on Ricky Gervais, Harry Potter and his perfect role
News
i100
Sport
Frank Lampard will pass Billy Wright and equal Bobby Charton’s caps tally of 106 caps against
sportFormer Chelsea midfielder in Etihad stopgap before New York contract
PROMOTED VIDEO
Arts and Entertainment
The first film introduced Daniel Radcliffe to our screens, pictured here as he prepares to board the train to Hogwarts for the first time.
booksHow reading Harry Potter helps children grow up to be gay-friendly
Arts and Entertainment
A scene from Aladdin is performed at the Tony Awards in New York in June
theatreBrit producer Lythgoe makes kids' musical comedy a Los Angeles hit
Sport
Usain Bolt of Jamaica smiles and shakes hands with a competitor after Jamaica won their first heat in the men's 4x100m relay
sport
News
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Financial Analyst - Forecasting - Yorkshire

£300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

Business Architect - Bristol - £500 per day

£500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

Regulatory Reporting-MI-Bank-Cardiff-£300/day

£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Day In a Page

Save the Tiger: Meet the hunters tasked with protecting Russia's rare Amur tiger

Hunters protect Russia's rare Amur tiger

In an unusual move, wildlife charities have enlisted those who kill animals to help save them. Oliver Poole travels to Siberia to investigate
Transfers: How has your club fared in summer sales?

How has your club fared in summer sales?

Who have bagged the bargain buys and who have landed the giant turkeys
Warwick Davis: The British actor on Ricky Gervais, how the Harry Potter set became his office, and why he'd like to play a spy

'I'm a realist; I know how hard this business is'

Warwick Davis on Ricky Gervais, Harry Potter and his perfect role
The best swim shorts for men: Bag yourself the perfect pair and make a splash this summer

The best swim shorts for men

Bag yourself the perfect pair and make a splash this summer
Has Ukip’s Glastonbury branch really been possessed by the devil?

Has Ukip’s Glastonbury branch really been possessed by the devil?

Meet the couple blamed for bringing Lucifer into local politics
Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup