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Widening Budget Deficit Masks Signs of U.K. Economic Revival

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Chancellor of the Exchequer George Osborne
With the economy returning to growth, Chancellor of the Exchequer George Osborne may find it easier to hold the budget deficit to 120 billion pounds, or 7.5 percent of gross domestic product, in the current fiscal year as forecast by his fiscal watchdog, the Office for Budget Responsibility. Photographer: Simon Dawson/Bloomberg

July 19 (Bloomberg) -- Britain’s budget deficit widened in June amid a deterioration in the finances of local government, masking signs of an improving economy as tax receipts rose.

Net borrowing excluding temporary support for banks was 12.4 billion pounds ($18.9 billion) compared with 11.9 billion pounds a year earlier, the Office for National Statistics said in London today. The figures exclude 3.9 billion pounds of coupon cash received from the Bank of England on its holdings of gilts. Underlying tax receipts rose 2.9 percent and spending climbed 1.8 percent.

With the economy returning to growth, Chancellor of the Exchequer George Osborne may find it easier to hold the budget deficit to 120 billion pounds, or 7.5 percent of gross domestic product, in the current fiscal year as forecast by his fiscal watchdog, the Office for Budget Responsibility.

The government appears to be “on track” to meet its full-year forecast,” said James Knightley, an economist at ING Bank in London. “With economic activity starting to show some positive signs and with employment continuing to grow we would not be surprised to see the full-year borrowing figure creeping below this forecast.”

The pound was little changed after the data and was trading at $1.5241 as of 9:50 a.m. in London, up 0.1 percent on the day.

More Austerity

Weaker-than-forecast growth has forced Osborne to extend his budget-cutting drive until 2018, turning the question of how to do it into a key battleground for the 2015 general election.

Osborne insisted this month he can achieve his goals through spending cuts alone, putting pressure on the Labour opposition to say whether it would match his plans, raise taxes or increase borrowing. The deficit has fallen by less than a third from its peak above 11 percent of gross domestic product in 2009-10 instead of the half originally projected.

Revenue in May from a deal with Switzerland to fight tax evasion was revised to 342 million pounds from a previous estimate of 3.2 billion pounds. A statement from the Swiss Bankers Association “cast significant doubt” over the amount that will finally be received, the ONS said.

The deficit for the first three months of the fiscal year was unchanged at 35.9 billion pounds from 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.

Tax Jump

In June, revenue rose across the board, led by an 11 percent annual increase in corporation tax, today’s figures showed.

In 2012-13, the deficit was 116.4 billion pounds, or 7.4 percent of GDP, lower than the 118.8 billion pounds previously thought. The revision was due to updates to tax estimates.

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 this month.

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 June, a figure boosted by the financial position of publicly controlled banks. The central-government deficit was 7.7 billion pounds. Net debt climbed to 1.2 trillion pounds, or 74.9 percent of GDP.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net

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