U.K. Budget Gap Widens on Municipal Spending

Photographer: Chris Ratcliffe/Bloomberg

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Photographer: Chris Ratcliffe/Bloomberg

A street cleaner sweeps the pavement opposite the main entrance to the Bank of England in the City of London.

Britain’s budget deficit widened in June due to a deterioration in the finances of local government, while a recovering economy boosted tax receipts in the economy.

Net borrowing excluding temporary support for banks was 12.4 billion pounds compared with 11.9 billion pounds a year earlier, the Office for National Statistics said in London today. The figures exclude 3.9 billion pounds of coupon cash received from the Bank of England on its holdings of gilts. Underlying tax receipts rose 2.9 percent and spending climbed 1.8 percent.

With the economy returning to growth, Chancellor of the Exchequer George Osborne may find it easier to hold the budget deficit to 119.8 billion pounds, or 7.5 percent of gross domestic product, in the current fiscal year as forecast by his fiscal watchdog, the Office for Budget Responsibility.

Osborne “will be fervently hoping that the economy can extend and build on its recent signs of improvement,” said Howard Archer, chief U.K. economist at IHS Global Insight in London. “If it can, it will not only increase the chances of beating the fiscal targets for 2013/14 but make it easier for him to rebut calls for an easing up in the pace of fiscal austerity.”

Weaker-than-forecast growth has forced Osborne to extend his budget-cutting drive until 2018, turning the question of how to do it into a key battleground for the 2015 general election.

Osborne insisted this month he can achieve his goals through spending cuts alone, putting pressure on the Labour opposition to say whether it would match his plans, raise taxes of increase borrowing. The deficit has fallen by less than a third from its peak above 11 percent of gross domestic product in 2009-10 instead of the half originally projected.

Accrued revenue from a deal with Switzerland to fight tax evasion in May was revised to 342 million pounds from 3.2 billion pounds.

The deficit for the first three months of the fiscal year was unchanged at 35.9 billion pounds from a year earlier. The figures exclude BOE coupon payments and the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets in April 2012.

In 2012-13, the deficit was 116.4 billion pounds, lower than previously thought.

In total, the BOE will transfer 23.4 billion pounds -- 3.9 billion pounds each month between April and September -- to clear cash that had accumulated in its asset-purchase facility as of March 2013. In addition, there will be quarterly payments of cash that build up during the current fiscal year, probably starting this month.

While European Union rules mean only 12.3 billion pounds of the income can count against net borrowing this year, cash measures of the public finances will receive the full benefit.

There was a public-sector cash requirement of 3.1 billion pounds in June, a figure boosted by the financial position of publicly controlled banks.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net

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