Britain posted its biggest August budget deficit on record, heaping pressure on Chancellor of the Exchequer George Osborne as the recession hits tax revenue and pushes up spending on welfare.
The shortfall excluding government support for banks was 14.4 billion pounds ($23.5 billion), the Office for National Statistics said in London today. The median of 21 forecasts in a Bloomberg News survey was for a deficit of 15 billion pounds. Tax revenue rose 1.8 percent in August from a year earlier and government spending climbed 2.5 percent.
The figures highlight the damage being wrought by weaker-than-expected economic output this year. Economists say Osborne is set to miss his self-imposed deadline to start bringing down debt in three years, leaving him to choose between abandoning the goal or announcing fresh austerity measures. Bank of England Governor Mervyn King said yesterday it may be “acceptable” to miss the target if it was because of the weak economy.
“If you extrapolate from today’s figures, we will be somewhere between 10 billion and 35 billion higher than expected for the year,” said George Buckley, an economist at Deutsche Bank AG in London. “The deficit is only fractionally higher than last year, so in some ways it’s good news, but we’re still looking at a big overshoot.”
The pound extended its advance against the dollar after the report and was trading at $1.6277 as of 11:08 a.m. in London, up 0.4 percent on the day. The yield on the 10-year gilt was 4 basis points higher at 1.84 percent.
The deficit in the first five months of the fiscal year that started in April widened to 59 billion pounds from 48.4 billion pounds a year earlier. Economists say Osborne may miss his 120 billion-pound full-year target by as much as 10 billion pounds, according to the average of independent forecasts compiled by the Treasury. The statistics office revised down its estimate of the 2011-12 deficit to 119.3 billion pounds from 125 billion pounds.
With the economy predicted to shrink this year for the first time since 2009, economists say Osborne may be forced to either scrap his plan to see net debt falling as a share of the economy from 2015 or risk a public and political backlash by making further spending cuts.
King said that Osborne’s fiscal plan “did allow for the fact that if the economy were to grow slowly, then taxes would not rise as quickly and spending would be higher so the deficit would be bigger.”
On potentially missing the debt target, he said: “If it’s because the economy’s grown slowly, yes, indeed, and that was always part of the plan.”
Osborne would have to decide whether letting the target slip would alarm financial markets and drive up borrowing costs or be seen as a sensible move given the fragility of the economy.
The chancellor is due to make a statement to Parliament on Dec. 5 after receiving revised fiscal and economic forecasts from his budget watchdog, the Office for Budget Responsibility. The OBR will also say whether there is still a realistic chance of erasing the structural budget deficit by 2017, although some leeway is provided as the five-year rolling target moves to 2018 next year.
The Treasury cautioned in a statement against trying to second-guess the OBR given the economic uncertainties. While the government is sticking to its spending plans, tax receipts have barely grown so far this year. The OBR had predicted an increase of almost 4 percent for the year as a whole. August’s revenue figure was depressed by a 2.1 percent drop in corporation taxes.
A cash measure showed the public finances in surplus by 9.6 billion pounds, a figure boosted by publicly controlled banks. The central government balance was in deficit by 8.5 billion pounds.
Net debt climbed to 1.04 trillion pounds, or 66.1 percent of gross domestic product. The OBR’s March forecasts showed net debt peaking at 76.3 percent of GDP in 2014-15.
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 fiscal consolidation is making things worse. Osborne says his program has helped to insulate Britain from the euro-area debt crisis and push down borrowing costs.
King said that there are signs of a modest recovery in the U.K., though he cautioned that a “black cloud of uncertainty” remains, and a lot will depend on global developments.
Global finance chiefs are scheduled to gather in Tokyo next month for the annual meetings of the International Monetary Fund and World Bank. The IMF will cut its projections for world growth by “a few decimal points,” Hoe Ee Khor, an assistant director in the IMF’s Asia and Pacific Department, said on a conference call with reporters yesterday.
The most recent IMF forecast, released in July, projected global growth of 3.5 percent in 2012 and 3.9 percent in 2013. Updated forecasts are scheduled for Oct. 9, before the Tokyo meetings.
The World Trade Organization trimmed its prediction today for the increase in global commerce in 2012 to 2.5 percent, from 3.7 percent five months ago. The IMF cut its estimate for South Korea’s 2012 growth to 3 percent from 3.25 percent.
The Bank of Japan downgraded its assessment for the world’s No. 3 economy this week, saying growth had “come to a pause.” It also followed the U.S. Federal Reserve in expanding stimulus.
Data yesterday showed Japan’s exports fell 5.8 percent in August from a year earlier, the third straight decline, on weakness in demand from the European Union and China. Imports slid 5.4 percent.
In Europe, house prices in the Netherlands dropped by 8 percent in August from a year earlier as uncertainty persisted about a further cutting-back of mortgage tax breaks. Values also fell 8 percent in July, the biggest drop since the index started in 1995. A report from Belgium is forecast to show that businesses there became less pessimistic this month, according to a Bloomberg News survey.