U.K. Posts First July Deficit Since 2010 as Spending Up
Net borrowing excluding temporary support for banks was 488 million pounds ($764 million) compared with a surplus of 823 million pounds a year earlier, the Office for National Statistics said in London today. Including coupon cash received from the Bank of England on its holdings of gilts, the deficit was 62 million pounds. Underlying tax receipts rose 3.4 percent, lagging behind a 3.7 percent increase in spending.
Britain’s economic recovery has gathered momentum in recent months, which will help Chancellor of the Exchequer George Osborne meet his budget targets as he tries to reduce the deficit. While Barclays Plc described the July data as “disappointing,” it said the government may take “some comfort” from the increase in receipts and is broadly on track to meet its full-year goal.
“With a pinch of luck and a dash of growth, the U.K. fiscal position should start to look a bit better over the next few quarters,” said Rob Wood, an economist at Berenberg Bank in London. “A return to growth from stagnation is welcome and we are optimistic that it will kick-start a more sustainable expansion that should, along with austerity measures, gradually put the government’s finances on a firmer footing.”
In July, revenue growth was led by a 5.8 percent increase in income tax from a year earlier, today’s report showed. Corporation-tax payments declined 0.9 percent. Spending was pushed up by a 4.5 percent jump in outlays by government departments.
“Strong tax receipts in July confirm that the economy is moving from rescue to recovery,” the Treasury in London said in a statement. “There is still a long way to go as the U.K. recovers from the biggest economic crisis in living memory, and the government is sticking to the economic plan.”
Economic growth accelerated to 0.6 percent in the second quarter. A measure of new orders at factories rose to the highest in two years in August, the Confederation of British Industry said today. Its manufacturing gauge advanced to zero from minus 12 in July. That exceeded the median estimate of minus 8 by 14 economists in a Bloomberg News survey.
The recent strengthening follows a weaker-than-forecast recovery over the past two years that forced Osborne to extend his fiscal squeeze until 2018. GDP in the second quarter was 3.3 percent below its peak in early 2008.
The pound approached a seven-week high versus the euro and stayed close to the strongest level in two months versus the dollar. Sterling advanced 0.3 percent to 85.39 pence per euro as of 11:45 a.m. London time after appreciating to 85.05 on Aug. 15, the strongest level since July 3. Against the dollar, it increased 0.1 percent to $1.5692.
U.K. government bonds declined, pushing 10-year yields toward the highest in more than two years. The 10-year gilt yield rose three basis points to 2.70 percent.
In the first four months of the fiscal year, the underlying deficit widened to 36.8 billion pounds compared with 35.2 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. Tax income rose 3.5 percent and spending gained 4.3 percent. The OBR has forecast a 3 percent increase in tax receipts and a 2.2 percent gain in spending for the current fiscal year to end-March 2014.
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 builds up during the current fiscal year, the first of which was made last month. A total of 5.3 billion pounds was paid in July, the ONS said.
European Union rules mean only 12.3 billion pounds of the income can count against net borrowing this year. Almost all of that had been received by June, with only 400 million pounds accruing last month.
Cash measures of the public finances will receive the full benefit. There was a public-sector cash surplus of 19.6 billion pounds in July. The central-government surplus, which excludes the financial position of state-owned banks, was 8.8 billion pounds. Net debt was 1.19 trillion pounds, or 74.5 percent of GDP. That’s up from 71.1 percent a year ago.
In the U.S., the Federal Reserve will publish the minutes of its its July 30-31 meeting at 2 p.m. New York time that may offer clues on whether officials will start reducing their $85 billion of monthly bond purchases. Existing U.S. home sales rose to an annual rate of 5.15 million units in July, the highest level since 2009, according to a Bloomberg survey of economists before the National Association of Realtors reports the data today.
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