U.K. Budget Deficit Unexpectedly Swells on Spending Gain

Chancellor of the Exchequer George Osborne
The figures are a blow for Chancellor of the Exchequer George Osborne as he prepares to announce new economic forecasts in his Autumn Statement on Dec. 5. Photographer: Simon Dawson/Bloomberg

Britain’s budget deficit unexpectedly widened in November as spending surged and a drop in income-tax receipts depressed government revenue.

The shortfall excluding government support for banks was 17.5 billion pounds ($28 billion) compared with 16.3 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 19 estimates in a Bloomberg News survey was for a deficit of 16 billion pounds. Spending rose 6.3 percent and revenue gained 0.6 percent.

The Office for Budget Responsibility cut its growth forecasts this month and said Chancellor of the Exchequer George Osborne will miss his target of cutting the burden of government debt by 2015, prompting warnings that Britain could lose its top credit rating. Fitch Ratings said letting the debt goal slip weakened the credibility of his fiscal regime and Standard and Poor’s lowered its outlook to negative from stable, citing weak prospects.

“The chancellor acknowledged in his autumn statement that the public finances are taking longer to rectify than had been targeted,” said Howard Archer, an economist at IHS Global Insight in London. “There has to be a very real danger that at least one of the credit rating agencies will strip the U.K. of its AAA rating over the coming months.”

The pound remained lower against the dollar and was trading at $1.6247 as of 9:35 a.m. in London, down 0.2 percent on the day. In a separate report, the statistics office cut its estimate of growth in the third quarter to 0.9 percent from 1 percent.

Income Tax

Tax revenue was held back last month by a 12 percent drop in income-tax receipts to 9.2 billion pounds. That was partly offset by taxes on corporate profits, which rose 18 percent to 1.6 billion pounds.

Welfare costs rose 5 percent on the year and central government spending jumped 9 percent, partly reflecting payments to local academies. There was also an increase in capital investment.

In the first eight months of the fiscal year, the deficit climbed to 92.7 billion pounds from 84.4 billion pounds a year earlier, with spending up 2.7 percent and revenue down 0.1 percent. Those figures exclude a one-time boost from the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets to the public sector. The OBR, a non-partisan body that oversees forecasting for the Treasury, predicts a deficit of 120 billion pounds for the full fiscal year.

Debt Target

A cash measure showed the public finances in surplus by 6.8 billion pounds. This was due to the financial position of publicly-controlled banks. The central government cash deficit was 12 billion pounds. Net borrowing including financial interventions was 15.3 billion pounds.

In his Dec. 5 statement Parliament, Osborne said the economy will shrink by 0.1 percent this year, rather than grow 0.8 as forecast in the March budget, and the OBR downgraded its growth estimates for the next four years, blaming the euro-region debt crisis. The underlying deficit will be more than 100 billion pounds higher than previously thought, forcing Osborne to roll over his target for erasing the structural deficit by another year to 2018.

Osborne drew criticism by counting 3.5 billion pounds from the planned sale of 4G mobile-phone spectrum licences against the deficit this year, along with 11.5 billion pounds from the transfer of income the Bank of England has accrued on its asset-buying program.

There will also small downward effect on borrowing from a decision to reclassify nationalized mortgage lenders Northern Rock Asset Management and Bradford & Bingley Plc as part of central government.

Ratings Risk

The ONS said proceeds from the 4G sale will be known in February or March and included in the public finances in the following report. The transfer of Bank of England gilt-coupon income and the reclassification of Northern Rock and Bradford & Bingley are expected to be included in early 2013, it said.

Net debt climbed to 1.04 trillion pounds last month, or 68.5 percent of gross domestic product, the highest since records began in 1993, the statistics office said. The OBR expects the ratio to reach 79.9 percent 2015-16 and begin falling the following year, 12 months later than planned.

S&P said last week there is a one-in-three chance it will cut its AAA rating in the next two years, although such move may have little market impact.

French 10-year yields have fallen this year despite the country losing its top rating with Standard & Poor’s in January and with Moody’s Investors Service last month. The U.S., meanwhile, has been deemed more creditworthy by investors since S&P stripped the nation of its AAA grade in 2011, with 10-year note yields dropping to a record low this year.

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