The Government borrowed its lowest amount for 10 years last month
The Office for National Statistics said public sector net borrowing, excluding state-owned banks, fell by £300 million to a lower-than-expected £6.7 billion in May, in contrast to the same month last year.
It was the lowest borrowing level for the month since 2007, and came in below economist forecasts of £7.5 billion.
Chancellor Philip Hammond faces an increasingly tough challenge to balance the books as rising inflation is predicted to hamper consumer spending and cause the economy to slow.
The statistics agency also revealed a brighter picture for net borrowing for the financial year to date, which came in at its smallest amount since 2008.
The ONS said the budget deficit for the period from April to May this year fell by £100 million to £16.1 billion compared with last year.
The Office for Budget Responsibility (OBR), Britain’s fiscal referee, expects the Government to record a deficit of £58.3 billion for the financial year to March 2018.
Among her election pledges, Prime Minister Theresa May vowed to deliver a balanced budget by the “middle of the next decade”, knocking back Mr Hammond’s previous target of putting the public finances back in the black by 2020.
Chancellor Philip Hammond faces an increasingly tough challenge to balance the books
Oliver Kolodseike, senior economist at the Centre for Economics and Business Research (Cebr), said last month’s performance was “welcome news” for Mr Hammond, but expects borrowing to rise later this year.
He said: “Earlier this week, Philip Hammond stressed that the Government was prepared to borrow more in order to invest and thereby boost economic growth and raise living standards, adding to Cebr’s expectations that borrowing may be even higher than the OBR currently projects.
“Of course, the extent to which the Government will increase borrowing depends on the magnitude of the overall economic slowdown and the kind of Brexit deal the UK will reach with the EU.”
The deficit narrowed last month after the Government raked in its highest tax receipts for May since records began, rising £2.6 billion to £52.7 billion.
There is still uncertainty around the Brexit negotiations
Value-added tax (VAT) climbed by £500 million to £11.2 billion over the period, while corporation tax increased by £100 million to £4.7 billion and income tax rose by £300 million to £11.7 billion.
However, Government spending also stepped up by £2.2 billion to £55.8 billion last month.
The ONS said public sector net debt excluding state-owned banks rose by £34.8 billion to £1,603.8 billion last month, equivalent to 79.8%% of GDP.
John Hawksworth, PwC chief economist, said: “Taking April and May together, the deficit of around £16 billion was very similar to the same two months last year, whereas the OBR had forecast that borrowing would rise this financial year as one-off favourable factors unwound.
The ONS said the budget deficit for the period from April to May this year fell by £100 million
“Of course, it is very early days in this financial year, but the Chancellor will take some cheer from these figures.
“Looking ahead, however, the economy is slowing and considerable uncertainties remain around the outcome of the Brexit negotiations.
“At the same time, political pressures for higher spending on health, social care, education, policing, social housing and public pay more generally have increased.”
The pound was down 0.1% versus the US dollar at 1.260 and 0.2% lower against the euro at 1.131 following the announcement.