Britain posted its smallest September budget deficit since 2008, providing a boost for Chancellor of the Exchequer George Osborne as he struggles to meet his borrowing targets.
The shortfall excluding government support for banks narrowed to 12.8 billion pounds ($20.5 billion) from 13.5 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 21 estimates in a Bloomberg News survey was for a deficit of 13.5 billion pounds. The fall was due to an improvement in the finances of local government and publicly controlled companies. Central-government tax revenue and spending both rose by 3.7 percent.
Britain’s public finances have been hit by a double-dip recession that has depressed tax revenue and pushed up spending on welfare. Today’s figures showed borrowing between April and August was revised down by 6.7 billion pounds, meaning Osborne may overshoot his full-year target by less than previously estimated. He is scheduled to publish new forecasts in December.
“Borrowing is still likely to overshoot the Office for Budget Responsibility’s Budget 2012 forecasts, but by much less than expected,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “This will make for a much less awkward Autumn Statement for the chancellor and should assuage some of the recent concerns about the extent of the underlying deterioration in the U.K. public finances.”
The pound was little changed against the dollar today and was at $1.6052 as of 11:10 a.m. in London. Government bonds rose, pushing the yield on the 10-year gilt down 10 basis points to 1.9 percent.
In the first six months of the fiscal year, the deficit climbed to 65.1 billion pounds from 62.4 billion pounds a year earlier. The OBR, the government’s fiscal watchdog, predicted in March that the deficit would widen to 120 billion pounds in the full fiscal year from 121.6 billion pounds in 2011-12.
The downward revision to the April-August deficit was split between central government and public corporations, with revisions to spending estimates across government departments.
A cash measure showed the public finances with a surplus of 623 million pounds, though this was due to the position of publicly-controlled banks. The central government deficit was 22 billion pounds.
Osborne is due to make a statement on Dec. 5 after receiving revised fiscal and economic forecasts from the OBR. In the fiscal year to date, government income has risen just 0.8 percent, while spending has increased 2.1 percent.
The economy has fared far worse than the OBR predicted in March, and Osborne may find it impossible to meet his target to start reducing debt as a share of the economy by 2015 without risking the recovery with further austerity measures. Despite signs of a return to growth in the third quarter, the economy’s underlying momentum remains weak.
The dilemma facing the chancellor was underscored when Fitch Ratings said on Sept. 28 that the country faces an increased risk of losing its AAA rating because government debt will peak at a higher level and later than it previously thought. Net debt climbed to 1.07 trillion pounds last month, or 67.9 percent of gross domestic product.
Britain’s economy is on course to shrink this year for the first time since 2009, fueling accusations from the opposition Labour Party that the government is trying to cut the deficit too quickly. Osborne insists his plans are insulating Britain from the euro-area debt crisis and holding down borrowing costs.
“We need tough decisions on tax, spending and pay but to succeed in getting the deficit down we also need a plan for jobs and growth,” said Rachel Reeves, a finance spokeswoman for Labour. “Unless the chancellor takes urgent action to boost the economy now he will end up borrowing billions more to pay for economic failure.”
In addition to the government’s fiscal squeeze, Britain’s economy is at risk from the euro turmoil and cooling global growth. The Bank of England said this week that “slowing activity in the rest of the world had been a drag on U.K. exports and had hampered the rebalancing process.”
China yesterday reported that growth eased for a seventh straight quarter. Gross domestic product rose 7.4 percent in the third quarter from a year earlier, compared with 7.6 percent expansion in the previous three months.
In Europe today, leaders committed to their goal of establishing a euro-area bank supervisor by year-end, opening the prospect of direct aid to Spain’s banks.
The European Union will seek to agree on a framework that makes the European Central Bank the main supervisor by Jan. 1, according to conclusions released early today after a summit in Brussels. The new system, intended to break the link between banks and governments at the root of the region’s financial crisis, will phase in over the next year.
In the U.S., sales of existing homes fell 1.7 percent in September to a 4.74 million annual rate, a Bloomberg survey of economists showed before a report today. The National Association of Realtors will publish the data at 10 a.m. in Washington.