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.

Life and Style
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
ebookA unique anthology of reporting and analysis of a crucial period of history
Luis Suarez looks towards the crowd during the 2-1 victory over England
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform