June 21 (Bloomberg) -- Britain’s budget deficit narrowed in May as government spending fell and the Treasury got a 3.2 billion-pound ($5 billion) boost from a deal with Switzerland to fight tax evasion.
Net borrowing excluding temporary support for banks was 12.7 billion pounds compared with 15.6 billion pounds a year earlier, the Office for National Statistics said in London today. The figures exclude the receipt of 3.9 billion pounds of coupon cash from the Bank of England’s gilt holdings.
The report comes as Chancellor of the Exchequer George Osborne prepares to outline 11.5 billion pounds of cuts to government departments’ budgets for the 2015-16 fiscal year after weaker-than-forecast growth forced him to prolong his austerity program beyond the 2015 general election. The underlying deficit in May was little changed if money from the tax on Swiss bank accounts held by Britons is excluded.
“With borrowing still at very high levels, next week’s spending review is a reminder of how much austerity still lies ahead,” said Vicky Redwood, chief U.K. economist at Capital Economics Ltd. in London and a former Bank of England official. “The review will detail how only a fraction of the pain that still lies ahead will be achieved. The economic recovery still faces an uphill battle to establish itself against the continued drag from the public sector.”
The deficit in the fiscal year that ended March increased marginally to 118.8 billion pounds from a downwardly revised 118.5 billion pounds a year earlier. The Office for Budget Responsibility forecasts the shortfall will be 119.8 billion pounds this year, or 7.5 percent of gross domestic product.
In the first two months, the gap was 21.4 billion pounds compared with 24.3 billion pounds a year earlier. The figures exclude BOE coupon payments and the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets in April 2012.
The pound was trading at $1.5487 as of 11:47 a.m. in London, down 0.1 percent on the day. The benchmark 10-year gilt yield rose 5 basis points to 2.34 percent, the highest since March 2012.
Tax income excluding the BOE transfer and Swiss account revenue rose 2.8 percent from a year earlier. Including those sources of income, revenue jumped 21 percent Government spending fell 4.5 percent, with outlays by departments dropping 7.9 percent.
“Today’s data demonstrate that the government is getting a grip of public spending,” Prime Minister David Cameron’s spokesman, Jean-Christophe Gray, told reporters in London today. “It shows the deficit-reduction plan is working. Obviously that needs to be stuck at. That’s exactly what this government is doing.”
In total, the BOE will transfer 23.4 billion pounds -- 3.9 billion pounds each month between April and September -- to clear cash that had accumulated in its asset-purchase facility as of March 2013. In addition, there will be quarterly payments of cash that build up during the current fiscal year, probably starting in July.
While European Union rules mean only 12.3 billion pounds of the income can count against net borrowing this year, cash measures of the public finances will receive the full benefit.
There was a public-sector cash requirement of 3.1 billion pounds in May, a figure boosted by the financial position of publicly controlled banks. The central government deficit was 5.8 billion pounds. Net debt climbed to 1.19 trillion pounds, taking the burden to 75.2 percent of GDP from 74.8 percent.
Cash from the Swiss tax cooperation agreement, signed in January, is due to flow to the Treasury over the next year, the ONS said.
The financial crisis has wrought havoc with the public finances by sapping tax receipts and pushing up spending on welfare. Since peaking at 11.1 percent of GDP in 2009-10, the deficit has fallen by less than a third instead of the half the government projected when it took office three years ago.
Osborne’s spending review due June 26 follows weeks of wrangling with ministers. As of June 14, he had managed only 3.6 billion pounds of the savings required and had yet to reach an agreement with the Ministry of Defense amid warnings from military chiefs that further cuts could jeopardize front-line capabilities.
Elsewhere, China’s benchmark money-market rates tumbled from record highs after the central bank injected funds to alleviate the worst cash crunch in at least a decade.
The overnight repurchase rate dropped 442 basis points, or 4.42 percentage points, to 8.43 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. That’s the biggest drop since October 2007 and follows an unprecedented 527 basis point jump yesterday. The seven-day rate fell 227 basis points today to 8.50 percent, the largest decline since January 2012.
New Zealand’s consumer confidence rose in June. Pakistan’s central bank will probably keep its key rate unchanged at 9.5 percent, economists surveyed by Bloomberg News predicted.
In Europe, data from the French labor office showed wages rose 0.7 percent in the first quarter, as forecast in a Bloomberg survey.
To contact the reporter on this story: Svenja O’Donnell in London at Sodonnell@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at email@example.com