Osborne Hits Deficit Forecast as BOE Says Economy Better

Photographer: Simon Dawson/Bloomberg

Britain is on course for its fastest economic expansion since 2007 this year, fueling speculation the Bank of England might raise interest rates as early as the fourth quarter. Close

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Photographer: Simon Dawson/Bloomberg

Britain is on course for its fastest economic expansion since 2007 this year, fueling speculation the Bank of England might raise interest rates as early as the fourth quarter.

U.K. Chancellor of the Exchequer George Osborne achieved his deficit-reduction forecast in the latest fiscal year after stronger-than-expected growth boosted tax receipts.

Net borrowing fell to 107.7 billion pounds ($181 billion) in the 12 months through March, or 6.6 percent of gross domestic product, from 115.1 billion pounds a year earlier, the Office for National Statistics said in London today. Separately, the Confederation of British Industry said manufacturers’ optimism rose to the highest in more than four decades in April.

The reports came as Bank of England policy makers said Britain’s recovery is strengthening and estimated the economy expanded about 1 percent in the first and second quarters of the year. While the deficit is now the smallest in five years, Osborne has warned that five more years of austerity is needed to balance the budget.

“Government borrowing is high, but it is falling,” said Rob Wood, an economist at Berenberg Bank in London. “Austerity still has a long way to run, but with the economy growing rapidly now and wage growth beginning to perk up there is every chance it will fall faster than the chancellor is planning on.”

Government revenue rose 3.2 percent in the last fiscal year, while spending increased 1.4 percent. The deficit was in line with the 107.8 billion pounds projected by the Office for Budget Responsibility last month. In March, the shortfall was 6.7 billion pounds, less than the 11 billion-pound median forecast in a Bloomberg survey.

BOE Upbeat

The BOE’s Monetary Policy Committee said in the minutes of its April 9 meeting that the economy is “building momentum with some signs of modest rebalancing toward investment.” The CBI report showed that an index of factory sentiment jumped to 33 this month from 21 in January, the highest since 1973.

BOE officials voted 9-0 to keep the benchmark interest rate at a record-low 0.5 percent at the meeting. While the outlook is improving, Governor Mark Carney has said there is scope to wait for more spare capacity to be absorbed before raising the benchmark rate.

Consumer-price growth is below the BOE’s 2 percent target and the MPC also said that “near-term inflationary pressure appeared to have eased further” in the past month.

Election Battle

The improving budget figures, along with strengthening growth and cooling inflation, may help Prime Minister David Cameron as he prepares for local and European elections next month and a general election that’s just over a year away.

“With the economy gaining momentum and employment and wages responding there is likely to be better news on tax revenues through the fiscal year,” said James Knightley, an economist at ING Bank NV in London. That “could provide the chancellor with something of a war chest ahead of next year’s election.”

Britain will grow faster than any other Group of Seven economy this year, according to the International Monetary Fund. That’s fueling speculation the BOE might raise interest rates as early as the fourth quarter.

Officials are focusing on slack in the economy as they debate policy and said today they have a “range of opinions” on the measure. The minutes of their April meeting also showed they are trying to determine how an increase in self-employment will affect the inflation outlook.

Tax Boost

The ONS budget data showed that March revenue climbed 5.7 percent from a year earlier, boosted by value-added tax on sales and a 45 percent jump in stamp duty on purchases of property and shares. Receipts from taxes on personal incomes and corporate profits also rose strongly. Spending fell 1.3 percent, driven by lower departmental expenditure.

Improvements in the financial positions of local authorities and state-controlled corporations also helped the public finances.

The OBR, which raised its 2014 growth forecast to 2.7 percent last month, expects the deficit to fall to 95.5 billion pounds, or 5.5 percent of GDP, in the current fiscal year.

Today’s figures also show a measure of the deficit the Debt Management Office uses to calculate how much it needs to borrow in the financial markets was lower than forecast.

The central government net cash requirement excluding the loan books of Bradford & Bingley and Northern Rock Asset Management was 80.6 billion pounds in 2013-14, instead of the 87.5 billion pounds projected by the OBR last month. As a result, the DMO scaled back its 2014-15 financing requirement by 3.7 billion pounds.

Proceeds from the 4.2 billion-pound sale of Lloyds Banking Group Plc (LLOY) shares last month helped reduce the cash requirement, though had no effect on net borrowing, the ONS said. For the year as a whole, cash borrowing was also reduced by 31.1 billion pounds of gilt coupon income transferred from the BOE.

The overall public-sector cash requirement including state-controlled banks was 15.7 billion pounds last month.

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; Fergal O’Brien in London at fobrien@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Emma Charlton, Andrew Atkinson

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