U.K. Budget Deficit Narrows as Osborne’s Squeeze Bites: Economy

U.K. Chancellor of the Exchequer George Osborne
U.K. chancellor of the exchequer George Osborne. Photographer: Chris Ratcliffe/Bloomberg

Britain’s budget deficit narrowed in October as Chancellor of the Exchequer George Osborne slashed spending at government departments.

Net borrowing excluding support for banks fell to 6.5 billion pounds ($10.2 billion) from 7.7 billion pounds a year earlier, the Office for National Statistics said in London today. The shortfall was in line with the median of 13 forecasts in a Bloomberg News survey. Outlays at government departments dropped 3.1 percent, limiting overall spending growth to 1.1 percent. Revenue rose 4.1 percent.

Osborne and Prime Minister David Cameron have made all but eliminating a budget deficit of 9 percent of economic output by 2015 the centerpiece of their economic strategy, rebuffing opposition criticism that the cuts are hobbling growth. Only Greece, Ireland, Portugal and Iceland face a tighter fiscal squeeze among advanced economies, according to the International Monetary Fund.

“It’s a tad better than expected,” said Ross Walker, chief U.K. economist at Royal Bank of Scotland Group Plc. “The markets are asking ‘is there a medium-term strategy and is it working?’ The answer to both is yes.”

The pound was trading at $1.5649 as of 1 p.m. in London, little changed on the day. The yield on the benchmark 10-year government bond was down 3 basis points at 2.18 percent. It fell to 2.11 percent on Nov. 16, the lowest since at least 1992, when Bloomberg began collecting the data.

Harder Than Envisaged

Cameron said yesterday that bringing Britain’s debt under control is proving “harder than anyone envisaged” as Europe’s debt crisis hits economic growth, paving the way for the Office for Budget Responsibility to downgrade its forecasts next week.

Independent forecasts published by the Treasury last week showed the economy expanding by 1 percent this year, compared with the 1.7 percent the OBR predicted at the time of the March budget. The fiscal deficit in the fiscal year through March is forecast to be 6 billion pounds higher than predicted at 128 billion pounds. The budget office, which oversees economic forecasting for the Treasury, will publish revised forecasts on Nov. 29.

The Bank of England said today that 76 percent of respondents to a survey cited sovereign risk as being the greatest potential threat to Britain’s financial stability. Thirteen percent cited sovereign risk in the U.K., with examples including a rating downgrade, “loss of confidence in fiscal solvency or the gilt market, a debt crisis, and government default,” the central bank said.

Taxing Month

October is a key month for the public finances as quarterly payments of tax on corporate profits pour in. Corporation tax receipts last month fell 6.4 percent from a year earlier and taxes from income and capital gains declined 3.3 percent, a sign weaker growth is undermining the revenue needed to cut the budget gap.

In the first seven months of the fiscal year, the deficit was 68.3 billion pounds, compared with 78.7 billion pounds a year earlier. Revenue in the period rose 5.1 percent from a year earlier, behind the 7.2 percent predicted for the full fiscal year by the OBR. Spending climbed 2.4 percent, less than the OBR’s 3.6 percent forecast for the year.

The Treasury said the figures show Osborne is making “progress” with his plan to eliminate the structural deficit over the next four years.

“The difficult decisions which have delivered this reduction in borrowing have made the U.K. a relative safe haven in the sovereign-debt storm, but we are not immune to the turbulence in the euro zone and its impact on British businesses,” the Treasury said in an e-mailed statement.

Oil, Bank Profits

In an analysis of today’s figures, the OBR said the surprise fall in corporation tax reflected lower output of oil and gas and a sharp decline in receipts from financial firms.

“This is consistent with bank profit announcements in recent months, with profits affected by weaker investment banking activity, writedowns on euro-area sovereign debt and provisions for the misselling of payment protection insurance,” it said.

The outlook for receipts “is very dependent on developments in the wider economy,” the budget office said, while noting that the remaining months of the fiscal year represent a period when departments usually increase spending.

The British Chambers of Commerce, a lobby group representing more than 100,000 U.K. businesses, gave its backing for the budget squeeze, adding that the government should help mitigate the effects by focusing on growth policies.

‘On Course’

“Given the difficult economic situation, we believe that the fiscal strategy is on course and the government is right to continue to seek to reduce our structural deficit,” the group said in an e-mailed statement. “But with problems facing the euro zone and recent rises in U.K. unemployment, it is even more important to reallocate priorities within the overall fiscal plan to help businesses create jobs, export and invest.”

The deficit in October including government support for banks was 3.4 billion pounds. There was a public-sector net cash surplus of 643 million pounds, below the cash surplus of 1 billion pounds that was predicted by analysts. Net debt climbed to a record 966.6 billion pounds, or 62.3 percent of GDP.

The European Commission forecast earlier this month that debt will rise to 88.8 percent of GDP next year from 84 percent this year. It sees economic growth of 0.6 percent in 2012 as consumer spending and government spending decline.

Excluding financial interventions, the deficit in September was revised down by 1.2 billion pounds as a result of revisions to departmental estimates, the statistics office said.

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