Philip Hammond given more scope to increase NHS spending in autumn budget

Britain has recorded the biggest July budget surplus since the millennium, giving a boost to Philip Hammond as he considers ways to pay for greater NHS spending in the autumn budget.

The Office for National Statistics said public sector net borrowing, excluding the state-owned banks, went into surplus for July by £2bn, meaning the government received more in tax income than was spent on public services.

The surplus was the biggest recorded for the month of July in 18 years, and outstripped City analysts’ forecasts of about £1.1bn. However, the figures showed strong seasonal inflows of income tax receipts.

The better-than-expected results will pile pressure on Hammond to loosen the purse strings at the autumn budget after years of austerity. Unite, the trade union, said the latest figures showed there was capacity for further borrowing to protect the crumbling public sector.

John McDonnell, the Labour shadow chancellor, said the surplus had come at the expense of public services and living standards. “[Hammond] has passed on the deficit to his colleagues in other departments: record NHS deficits, schools begging parents for money for essentials, and a growing social care crisis,” he said.

The government has committed to find ways to finance a £20bn-a-year injection of extra cash into the NHS by 2023-24, with taxpayers expected to face increases when the chancellor delivers his budget. But despite the latest improvement in the public finances, which could help minimise the tax increases, Hammond has committed to delivering a zero annual deficit by the middle of the next decade.

The latest figures from the ONS showed total borrowing for the financial year so far, beginning in April, was the lowest for 16 years. The government deficit stood at £12.8bn, which is £8.5bn less than in the same period a year ago.

Ruth Gregory, a senior economist at the consultancy Capital Economics, said if the reduction in borrowing was sustained throughout this year, the deficit would undershoot the target set by the Office for Budget Responsibility by about £13bn.

“As things stand, the chancellor should have some extra money to play with in the autumn budget … He should be able to deliver the extra funds for the NHS without compromising his fiscal target or having to find savings elsewhere,” she said.

Although the latest snapshot hands the chancellor greater wriggle room, a Treasury spokesman said the government “cannot be complacent” when it comes to fixing the public finances.

“We must keep debt falling to build a stronger economy and secure a brighter future for the next generation,” he said.

Much of the improvement in July was due to growth in income tax receipts, with the UK reaching record employment levels, despite weaker economic growth and sluggish pay increases. The exchequer also recorded a jump in VAT receipts and corporation tax income.

In contrast, income from stamp duty has dropped by almost 10% for the financial year so far, reflecting weaker sales in the UK property market – particularly in London. Up to 40% of stamp duty tax receipts in the last financial year were from sales in the capital.

The Office for Budget Responsibility (OBR), the government’s budget watchdog, said the improvement for July was probably down to weaker growth in departmental spending this year, lower debt payments on government borrowing and changes in the timing of transfers to the EU budget.

Despite the positive news, observers said July tends to deliver surpluses for the public finances due to the timing of some tax returns, while warning there could be weaker months ahead as the UK economy stutters. While he faces calls from Labour and some Tory MPs to raise spending, Hammond may be reluctant to do so ahead of Britain leaving the EU.

John Hawksworth, chief economist at the accountancy firm PwC said the chancellor would probably still need to raise taxes at the autumn budget.

“He will still have some tough choices to make … if he is to fund planned increases in NHS spending and to respond to other pressing demands to ease austerity for schools, local councils, prisons, police and other public services.”