U.K. Has Biggest August Budget Deficit on Record on Spending

Britain had its biggest budget deficit for any August since modern records began in 1993 as government spending jumped and income-tax receipts declined.

The shortfall of 15.9 billion pounds ($25 billion), which excludes government support for banks, compares with 14 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 17 forecasts in a Bloomberg News survey was for a deficit of 13 billion pounds. Revenue rose 5.9 percent and spending increased 7.2 percent.

Doubts over whether Chancellor of the Exchequer George Osborne can hit his deficit-reduction goals increased yesterday after the International Monetary Fund lowered its growth forecasts for Britain, the U.S. and the euro region, warning that strong action was needed to prevent a return to recession.

“It’s increasingly looking as though the public finances are reacting to the slowdown in the economy and it’s looking unlikely” borrowing “will hit the Office for Budget Responsibility’s forecast for the year,” said Philip Shaw, an economist at Investec Securities in London. “The public finances are adding to the case for more quantitative easing” by the Bank of England.

The pound weakened to an eight-month low against the dollar after Bank of England officials said they may need to buy more bonds to keep borrowing costs low as the recovery falters. The U.K. currency was trading at $1.5650 as of 12:27 p.m. in London, down 0.5 percent on the day.

Deficit Plan

Prime Minister David Cameron has staked his premiership on a five-year plan to all but wipe out a deficit of more than 9 percent of economic output last year, saying the cuts are shielding Britain from the euro-region debt crisis and holding down borrowing costs.

The Labour opposition says the squeeze may prove self- defeating by harming the growth needed to reduce the deficit and public-sector unions plan to strike in November over proposed cuts to their pensions.

Piling pressure on Cameron, the IMF yesterday cut its 2011 growth forecast to 1.1 percent, a third less than predicted by the OBR, and urged countries with “historically low yields” such as Britain and Germany to delay fiscal adjustment if conditions get worse.

Revisions meant that borrowing between April and July was 4.6 billion pounds lower than previously estimated, leaving the deficit in the first five months of the fiscal year at 51.5 billion pounds, down from 55.3 billion pounds a year earlier.

Room for Maneuver

There was also a 5.9 billion-pound downward revision to the deficit in the year that ended in March, which is now estimated at 136.7 billion pounds. The bulk of the change related to better-than-expected outturns at local authorities, the ONS said.

With Osborne predicting a deficit of 122 billion pounds in the current fiscal year, analysts said the revisions gave the chancellor some room for maneuver should he wish to add stimulus to the economy. BBC television reported yesterday evening that ministers were discussing increasing spending on projects such as roads, rail and broadband by as much as 5 billion pounds, without saying where it got its information. The government denied the report.

The average of independent forecasts compiled by the Treasury this month is for a deficit of 126.8 billion pounds this year.

‘Challenging Times’

Revenue in the first five months rose 4.6 percent from a year earlier, behind the 7.2 percent predicted for the full fiscal year by the OBR, which oversees forecasting for the Treasury. Spending climbed 3.7 percent, in line with the OBR’s full-year forecast.

Last month, a tax on bank balance sheets raised 200 million pounds and is expected to contribute 2.4 billion pounds in the fiscal year as a whole, the statistics office said.

“These are challenging times, but despite economic growth being lower than the OBR’s forecast earlier this year, tax receipts have continued to grow and spending so far this year has grown at the rate the OBR forecast in the budget,” the Treasury said in a statement. It also welcomed the “substantial downward revision” to borrowing in the last fiscal year and so far this year.

To contact the reporter on this story: Jennifer Ryan in London Jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net