Britain Records Biggest Budget Surplus in Four Years: Economy

Chancellor of the Exchequer George Osborne
Chancellor of the Exchequer George Osborne. Photographer: Jerome Favre/Bloomberg

Britain posted the biggest budget surplus in four years in January, increasing pressure on Chancellor of the Exchequer George Osborne to provide some stimulus for the economy in his budget next month.

Revenue exceeded spending by 7.75 billion pounds ($12.3 billion), compared with a surplus of 5.2 billion pounds a year earlier, the Office for National Statistics said today in London. The median of 10 forecasts in a Bloomberg News survey was 6.3 billion pounds. January is the biggest tax-collection month of the year.

Osborne is refusing to bow to pressure from opposition politicians to relax his fiscal squeeze to promote growth when he presents his annual budget on March 21. Moody’s Investors Service said last week that while the U.K.’s Aaa rating was at risk from the crisis in Europe, the government’s commitment to deficit reduction supported the top grade.

“Together with the recent pick-up in the economic data, this might help the chancellor to claim at next month’s budget that his Plan A is still working,” Capital Economics Ltd. Chief U.K. Economist Vicky Redwood said. “We still think that borrowing will be much harder to pull down further ahead once economic growth slows.”

The pound was trading at $1.5810 as of 12:09 p.m. in London, down 0.3 percent on the day. The benchmark 10-year government bond yield was little changed at 2.23 percent. European stocks fell from a six-month high amid speculation a Greek bailout deal reached overnight won’t be sufficient to solve the nation’s debt crisis.

Greek Deal

European finance ministers approved a 130 billion-euro ($173 billion) bailout package for Greece early today by tapping into European Central Bank profits and convincing investors to provide more debt relief to prevent the nation defaulting. Bondholders’ response to the swap and parliamentary approvals in some European countries loom as risks to the deal.

The Stoxx Europe 600 Index lost 0.7 percent, its first decline in five days, and the MSCI Asia Pacific Index slipped 0.4 percent.

The U.K. budget figures showed that receipts rose 2.8 percent in January from a year earlier. The government receives a fifth of all taxes on company profits and gets final payments of income tax for the previous fiscal year in January. In the first 10 months of the fiscal year, the deficit narrowed to 93.5 billion pounds from 109.1 billion pounds. Government revenue increased 4.7 percent and spending grew 1.6 percent.

Budget Incentives

The data raise the possibility that borrowing in the fiscal year through March will come in below the 127 billion pounds forecast by the Office for Budget Responsibility in November, giving Osborne limited leeway to offer tax incentives in the budget, said Chris Williamson, chief economist at Markit.

“Our credible deficit plan is working,” the Treasury said in an e-mailed statement. It is “keeping interest rates at record lows for families and businesses and helping to support the recovery.”

Ed Balls, who speaks for the opposition Labour Party on economic matters, called on Feb. 19 for Osborne to lower sales tax to aid the economy. The Institute for Fiscal Studies said Feb. 1 lower borrowing could give the chancellor room to safely implement a “significant” fiscal stimulus to support growth.

While gauges of manufacturing and services improved in January, the economy shrank 0.2 percent in the fourth quarter and the Bank of England forecasts only a “gradual” recovery this year.

Policy Easing

Australia’s central bank said it has scope to ease monetary policy if needed, minutes of its Feb. 7 meeting released today showed. Elsewhere, Hong Kong said its unemployment rate fell to 3.2 percent in January from 3.3 percent in December.

In Europe, Switzerland’s trade surplus narrowed in January and a Danish consumer confidence index rose. Turkey’s central bank kept its one-week repo rate at a record low of 5.75 percent, maintaining the floor of the interest-rate corridor it’s using to slow inflation while supporting growth.

Euro-area consumer sentiment was probably little changed this month, with an index at minus 20.1 compared with minus 20.7 in January, according to a Bloomberg survey ahead of a release by the European Commission today. The Federal Reserve Bank of Chicago’s National Activity Index probably rose to 0.22 in January from 0.17 in December, according to another survey.

U.K. Debt

In the U.K., the surplus including government support for banks was 10.7 billion pounds. National debt was 989 billion pounds in January, or 63 percent of gross domestic product, falling below the 1 trillion-pound mark reached in December. There was a public-sector cash surplus of 16.8 billion pounds, compared with economists’ forecast for 24.7 billion pounds.

The statistics office said the sale of lender Northern Rock to Virgin Money added 653 million pounds to national debt. This is because a capital transfer of 1.4 billion pounds to Northern Rock in 2009 was treated as a “temporary effect” and not included in national debt until the sale to Virgin for 747 million pounds. The ONS said the sale includes some deferred payments that will over time reduce the impact on the debt.

The government is aiming to rid Britain of a budget deficit equal to 9 percent of gross domestic product by 2017 with a 147 billion-pound austerity program.

The improvement in the January data reflected less borrowing by local authorities and public corporations, with the central government posting weaker-than-forecast revenue growth, according to the Office for Budget Responsibility.

In the final two months of the fiscal year, growth in value-added tax is expected to be weak and revenue from financial-sector bonuses may fall, the budget watchdog said in a commentary on today’s figures. Spending growth, meanwhile, may pick up sharply as departments “backload” their outlays, although they are likely to undershoot November’s full-year forecast by more than 250 million pounds, it said.

Moody’s placed Britain’s Aaa rating on negative outlook on Feb. 13, a move Osborne said was a “reality check.”

There are “rising challenges,” Moody’s said. Still the government’s “response to negative developments late last year indicates its commitment to restoring a sustainable debt position.”

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