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U.K. Budget Deficit Narrows on Boost From BOE, 4G Sale

Britain had its smallest February budget deficit since 2008 after the Treasury received a second installment of cash from the Bank of England and proceeds from the sale of fourth-generation mobile spectrum.

The shortfall excluding temporary support for banks was 2.76 billion pounds ($4.3 billion) compared with 11.76 billion pounds a year earlier, the Office for National Statistics said in London today. The median forecast in a Bloomberg News survey was for a deficit of 8 billion pounds. The underlying deficit was 7.8 billion pounds.

Chancellor of the Exchequer George Osborne, delivering his annual budget yesterday, acknowledged the deficit will be more than 50 billion pounds higher than previously estimated over the coming years after his fiscal watchdog cut its forecasts for economic growth and tax revenue. Concern over the state of the public finances has weighed on the pound and gilts this year.

“While it is a good headline borrowing number, the underlying story on fiscal consolidation remains poor,” said James Knightley, an economist at ING Bank NV in London. He said sterling remains vulnerable to “downside risks, particularly against the dollar.”

A separate report today showed U.K. retail sales rose 2.1 percent in February in a rebound from a snow-disrupted January. It was the biggest increase in almost a year and exceeded the 0.4 percent median forecast in a Bloomberg News survey. The pound strengthened and was trading at $1.5180 as of 11:16 a.m. in London, up 0.5 percent on the day.

Revenue Boost

February’s deficit was reduced by 2.7 billion pounds of gilt-coupon income from the central bank and 2.3 billion pounds from the sale of 4G spectrum, the statistics office said.

There was a government cash surplus of 1.5 billion pounds. This measure will receive the full benefit of 11.4 billion pounds of cash from the BOE in the fiscal year that ends this month.

The central bank accumulates income on the 375 billion pounds of government bonds it has built up under its quantitative-easing program since March 2009. Under an agreement with Osborne last year, it will pay this over to the Treasury in regular installments. It paid 3.8 billion pounds in January and February and same amount will be transferred this month.

BOE Impact

The BOE cash will have a smaller impact on the government’s preferred measure of the deficit, net borrowing excluding financial interventions, under rules announced by the ONS last month. The Treasury will be able to book 6.4 billion pounds of the money in the current fiscal year and 12 billion pounds in the next one.

In the first 11 months of the fiscal year, the underlying deficit fell to 101.3 billion pounds from 104.2 billion pound a year earlier. The figures exclude a one-time boost from the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets as well as the Bank of England cash. The Office for Budget Responsibility yesterday predicted a shortfall of 120.9 billion pounds for the year as a whole, little changed from 2011-12.

Of the 4 billion-pound reduction in the underlying deficit in February, 2.3 billion pounds came from an improvement in the position of local authorities, the statistics office said. In central government, there was a 1.1 billion-pound increase in income-tax receipts and an 800 million-pound fall in current spending.

The deteriorating outlook prompted Moody’s Investors Service to strip Britain of its top credit rating last month. Osborne yesterday conceded that the burden of debt will not start falling until 2017-18, two years later than planned.

Net debt, which remained at 73.5 percent of gross domestic product in February, will peak at 85.6 percent in 2016-17, the OBR said yesterday. In December, the watchdog put the peak at 79.9 percent in 2015-16.

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