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U.K. Budget Deficit Swells as Recession Hits Tax Revenue

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Prime Minister David Cameron
Prime Minister David Cameron, seen here, and Chancellor of the Exchequer George Osborne have staked their reputations on all but eliminating the shortfall, currently 8.4 percent of gross domestic product, by 2017. Photographer: Scott Eells/Bloomberg

June 26 (Bloomberg) -- Britain had a larger budget shortfall than economists forecast in May as the recession hit taxes and pushed up welfare spending, casting doubt on whether Chancellor of the Exchequer George Osborne can meet his full-year deficit target.

The deficit excluding government support for banks was 17.9 billion pounds ($28 billion) compared with 15.2 billion pounds a year earlier, the Office for National Statistics said in London today. Economists forecast a deficit of 14.8 billion pounds, the median of 16 estimates in a Bloomberg News survey shows. Revenue rose 1.6 percent and spending climbed 7.9 percent.

The figures provided ammunition to the opposition Labour Party, which says the government is making the recession worse by trying to cut the deficit too quickly. With the euro-region debt crisis overshadowing global growth prospects, economists questioned whether Osborne can achieve his goal of narrowing the gap to 120 billion pounds in the current fiscal year.

“The deficit is going to be higher purely on the basis that the economy is going to be weaker,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “It’s not impossible that we get a deficit that is 7.5 billion pounds higher and that growth is flat for the whole year.”

The pound gave up earlier gains against the dollar and was trading at $1.5582 as of 1:40 p.m. in London, little changed on the day. The 10-year government bond yield gained 2 basis points to 1.693 percent.

Deficit Pledge

Osborne and Prime Minister David Cameron have staked their reputations on all but eliminating the deficit by 2017 after borrowing swelled to more than 11 percent of gross domestic product in the aftermath of the financial crisis and recession.

They say their plan is supporting the economy by keeping credit-rating companies onside and holding down borrowing costs at a time when debt-burdened European governments such as Spain are paying record rates.

Labour says the drive is making it harder rather than easier to tackle the deficit as wage freezes, public-sector job cuts and a squeeze on welfare damage economic growth.

“These figures are another nail in the coffin,” said Rachel Reeves, who speaks on economic affairs for Labour. “If you choke off the recovery and push the economy into recession, the government ends up having to borrow more, not less.”

The budget shortfall was 8.4 percent of GDP in the fiscal year that ended in March and the Office for Budget Responsibility, the non-partisan body that monitors the public finances, predicted in March the deficit would fall to 5.8 percent of GDP in the current fiscal year.

Higher Welfare

In the first two months, the shortfall widened to 30.7 billion pounds from 24.5 billion pounds in the year-earlier period, prompting economists to say the government may struggle to cut borrowing from the 127.6 billion pounds in the 2011-12 fiscal year.

The figures exclude a one-time boost in April from the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets to the public sector and 2.3 billion pounds from a Bank of England lending program that closed at the end of January.

In May, tax receipts were held back by a 7.3 percent annual drop in income-tax receipts, while spending was boosted by a 12 percent increase in welfare payments, reflecting an increase in unemployment. Departmental spending also climbed.

The Treasury said in a statement the government is committed to dealing with the deficit and that it is too early to draw conclusions about borrowing in the fiscal year as a whole.

Deeper Slump

Cameron’s assertion that the recession is the result of the euro-region debt crisis rather than his budget cuts was called into question after figures last month showed the slump was deeper than previously thought in the first quarter, while the euro region escaped recession altogether, thanks to growth in Germany.

Bank of England Governor Mervyn King told lawmakers today his vote for more stimulus this month reflected his concern that growth prospects in the Asia and the U.S. are dimming at a time when he’s pessimistic that Europe can resolve its debt crisis.

German consumer confidence will gain for the first time in five months in July as rising wages outweigh growing concerns that the sovereign debt crisis is damping economic growth, GfK SE said.

French consumer confidence stalled as President Francois Hollande prepared tax increases and spending cuts to help reduce the nation’s budget deficit, figures from national statistics Insee showed.

Asian Economy

In the Asia-Pacific region today, the Philippines said imports fell and the trade deficit narrowed in April. The government reported a budget shortfall for May as spending rose.

Singapore’s industrial production rose for the first time in three months in May as manufacturers increased output of pharmaceuticals and petroleum, countering a decline in electronics. In Hong Kong, exports grew in May at half the pace of a year earlier as Asian demand failed to offset weakness in shipments to the U.S. and the European Union.

Former World Bank Managing Director Graeme Wheeler was named New Zealand’s next central bank governor, inheriting a policy of record-low interest rates and the best-performing Group of 10 currency this year.

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

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

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