U.K. Unexpectedly Posts Deficit as Tax Receipts Plunge: Economy

U.K. Unexpectedly Posts Budget Deficit as Corporation Taxes Drop
George Osborne, U.K. chancellor of the exchequer, speaks during a global business summit at Lancaster House in London, on July 26, 2012. Photographer: Simon Dawson/Bloomberg

Britain unexpectedly posted a budget deficit in July as corporation-tax receipts plunged, partly due to the closure of the Elgin gas field in the North Sea.

The shortfall, which excludes government support for banks, was 557 million pounds ($878 million) compared with a surplus of 2.84 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 17 forecasts in a Bloomberg News survey was for a surplus of 2.2 billion pounds. Tax revenue fell 0.8 percent and corporation tax plunged 19.3 percent. Government spending rose 5.1 percent.

While the drop in revenue was largely centered on company taxes, the U.K.’s struggle to climb out of a recession has raised concerns that that Chancellor of the Exchequer George Osborne will miss his forecast for a deficit of 120 billion pounds in the current fiscal year. Osborne has resisted demands to ease the pace of his fiscal squeeze, saying his plans have helped to insulate Britain from the euro-area debt crisis.

“The figure highlights the huge challenges facing the U.K. in restoring stability to its public finances,” British Chambers of Commerce Chief Economist David Kern said. “To maintain credibility, we need to persevere with spending cuts, but supplement them with forceful policies to boost growth.”

The National Institute for Economic and Social Research predicts that Osborne will miss his target for the fiscal year ending March 2013 and forecasts a deficit of 138.5 billion pounds.

Tax Revenue

Corporation taxes fell 1.7 billion pounds in July from a year earlier, the statistics office said. July is traditionally a big month for company taxes and about 1 billion pounds of the decline was due to the oil and gas industry, where Total SA’s Elgin field was shut down after a leak was discovered in March. A decline in oil prices also affected receipts from the industry.

In the first four months of the fiscal year, the deficit widened to 44.9 billion pounds from 35.6 billion pounds a year earlier. 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.

Government spending rose 3.5 percent in the period, the statistics office said. Tax receipts were up 1.1 percent, lagging behind the OBR’s 3.9 percent full-year forecast. Corporation taxes fell 10.4 percent in the April-July period compared with a year earlier.

“This will raise pressure on the government to keep the fiscal plan on track,” said Alan Clarke, an economist at Scotiabank in London. “Tighten more to make up for lost ground, or loosen a little and hope that the extra growth delivers better public finances.”

Net Debt

A cash measure showed the public finances in surplus by 22.9 billion pounds in July. Net debt amounted to 1.03 trillion pounds, or 65.7 percent of gross domestic product. It reached a record 66.2 percent of GDP in June.

The statistics office also said that net borrowing in the fiscal year that ended in March was 125 billion pounds, 700 million pounds lower than previously estimated.

Britain’s economy shrank for a third straight quarter in the three months through June, fueling accusations from the opposition Labour Party that the pace of the government’s fiscal squeeze is making things worse. Osborne says his program has helped to push down borrowing costs.

The yield on the 10-year gilt was at 1.67 percent as of 11:12 a.m. in London, down from about 3 percent two years ago. The yield fell to a record low of 1.407 percent on July 23. Spain’s 10-year bond yield was at 6.22 percent today, while Italy’s was at 5.7 percent.

Osborne Support

Also in the U.K. today, the Confederation of British Industry said its index of manufacturing orders fell to minus 21 in August, the lowest in eight months, from minus 6 in July. A gauge of export orders declined to the lowest since January.

“The economic environment for U.K. manufacturers remains challenging, with domestic demand relatively muted and the ongoing euro-zone crisis now seeming to drag on broader global economic momentum,” said Anna Leach, the CBI’s head of economic analysis in London.

Osborne has lost the support of a group of economists who wrote an open letter before the last election supporting his fiscal squeeze, the New Statesman reported on Aug. 15. Only one of the 20 economists who put their names to the letter in February 2010 “was willing to repeat his endorsement,” the London-based magazine said.

Australian Confidence

By contrast, Australia’s central bank signaled confidence domestic growth would weather a “fragile” global economy in its decision this month to maintain the highest borrowing costs among major developed nations.

The Reserve Bank of Australia predicts an expansion rate over the “medium term” at around the economy’s trend pace, even as Europe’s woes cloud the outlook, according to minutes of its Aug. 7 board meeting that were released today in Sydney.

Elsewhere in the Asia-Pacific region, Hong Kong reported inflation slowed to 1.6 percent in July from 3.7 percent in June. Indian inflation eased to the slowest pace in four months, a separate report showed. The consumer-price index rose 9.86 percent from a year earlier, compared with a revised 9.93 percent in June, the Central Statistical Office said in New Delhi.

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