Philip Hammond has received a twin boost after the latest official figures showed consumers ignoring the threat of a no-deal Brexit to carry on spending, and higher tax receipts leading to a fresh fall in the government’s budget deficit.
Data from the Office for National Statistics showed retail sales – goods bought in shops or online – were up 0.4% in February, confounding City fears of a similar-sized decline.
The ONS also reported that record levels of employment raised tax revenues and resulted in the deficit for February being cut by £1bn from the same month a year ago to £200m.
Government borrowing in the first 11 months of the 2018-19 financial year was £23.1bn, down £18bn on the same period in 2017-18.
But while households have been shrugging off Brexit concerns, the Bank of England reported the looming 29 March deadline was affecting the willingness of businesses to invest.
Threadneedle Street, which left interest rates on hold at 0.75%, said the evidence supplied by its regional agents showed 60% of companies spoken to were worried, up from 40% in the immediate aftermath of the EU referendum in 2016.
The ONS said retail sales in the three months to February – a better guide to the underlying trend than one month’s data – were 0.7% higher than in the previous quarter.
Despite the jump in overall sales, supermarkets recorded a sharp decline last month. Food stores recorded the biggest drop in monthly sales since December 2016, as January sales promotions ended and retailers went “back to normal” on pricing, to the detriment of sales volumes.
Paul Dales, the chief UK economist at Capital Economics, said the pickup in retail spending in February was encouraging because it followed a 0.9% increase in January.
“There was little evidence that this was because the uncertainty caused by Brexit has led households to stock the cupboards with baked beans either. Food sales fell by 1.2% month on month,” Dales said.
Alcohol stores recorded the largest monthly decline among retailers in February, with shoppers reining in their spending after splurging on beer, cider, wine and spirits in December and January.
Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, said: “February’s retail sales figures show that the improving trend in real wages, and not the uncertainty created by the Brexit saga, is the dominant influence on households’ spending at present.”
The overall increase in sales comes as inflation eases back from a five-year high in 2017, while pay growth accelerates at the fastest rate in a decade. Employment has remained at a record high and unemployment has fallen to the lowest level since the start of 1975.
The Bank’s nine-member monetary policy committee has left interest rates on hold since last August and was not expected to change its stance this month. The City believes rates will be cut in the event of a no-deal Brexit, but raised if Theresa May’s deal is passed or there is a lengthy delay.
In the minutes of its latest meeting, the MPC said there was the “possibility of further cliff-edge uncertainties that could have a significant effect on [business] spending as any new deadline approached”, a day after Theresa May said she would seek an extension to the article 50 process until the summer.
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Threadneedle Street said more companies were stockpiling goods and had put off their investment plans amid lingering uncertainty, estimating business investment in the British economy was as much as 14% below where it would have been without Brexit.
It added that the cumulative effect on investment spending appeared to have increased recently.
Up to 20% of companies in a panel of key decision-makers surveyed by the Bank thought Brexit uncertainty would persist to 2021 or beyond.