U.K. Budget Deficit Narrows as Recovery Strengthens: Economy

Britain’s budget deficit narrowed in August as tax income rose and the government cut spending, providing further evidence that the recovery is taking hold.

Net borrowing excluding temporary support for banks was 13.2 billion pounds ($21.2 billion) compared with 14.4 billion pounds a year earlier, the Office for National Statistics said in London. The shortfall was in line with the 13.3 billion-pound median forecast in a Bloomberg survey of 19 economists. Tax receipts rose 1.4 percent and spending fell 2.2 percent.

Britain’s economic revival has gathered pace recently, putting Chancellor of the Exchequer George Osborne on course to meet his fiscal targets this year. The improvement has boosted support for his Conservative Party and undercut the Labour opposition’s argument that spending cuts are stifling growth.

Osborne “faces a more comfortable time at his Autumn statement than he has for a while,” said Philip Shaw, referring to the government’s budgetary update. “However there is still some way to go before the chancellor’s task is complete.”

The pound was little changed after the data and was trading at $1.6041 as of 11:32 a.m. in London. The benchmark 10-year gilt yield rose 2 basis points to 2.92 percent.

Treasury Reaction

Revenue rose across the board in August, with the exception of income and capital-gains tax, which declined 5.8 percent on the year because of changes in the timing of payments. Corporation-tax revenue climbed 3.7 percent. Spending by government departments fell 4.8 percent, with changes in the profile of payments to local authorities accounting for part of the drop. Welfare costs were unchanged from a year earlier.

The U.K. Treasury said borrowing is falling and the government will “stick to its plan” for reducing the budget deficit. There is a “long way to go,” it said in a statement.

Gross domestic product rose 0.7 percent in the second quarter and the recovery has picked up pace in the current quarter with house prices rising and builders, manufacturers and services firms all reporting the strongest growth for years.

“The government looks on course to achieve its forecast,” said James Knightley, an economist at ING Bank NV in London. “Tax revenues are rising now and we are starting to see falls coming through from government departmental spending, which hadn’t been the case for a while.”

Osborne’s Austerity

Osborne has reduced the deficit from a postwar high of 11 percent of GDP when he took office in 2010 to 7.4 percent, or 116 billion pounds, in the year through March. The Office for Budget Responsibility is predicting a similar shortfall in the current fiscal year. Austerity is projected to continue until 2018, three years later than first planned because of weaker-than-expected growth.

To aid the recovery, the Bank of England has said it plans to keep interest rates at a record low until the economy is growing sustainably. In the U.S. this week, the Federal Reserve unexpectedly said it would keep up its current pace of monthly bond purchases. Fed President Ben S. Bernanke said policy makers “want to make sure that the economy has adequate support.”

Earlier today, India’s central bank Governor Raghuram Rajan surprised analysts by raising the benchmark interest rate in his first policy review, seeking to rein in inflation that’s hurt the poor and dimmed economic prospects.

Rajan, who took office two weeks ago, lifted the repurchase rate by a quarter point to 7.5 percent, the first increase since 2011. All 36 analysts in a Bloomberg News survey predicted no change.

U.K. Revisions

In the U.K., the deficit for the fiscal year through March 2013 was revised to 115.7 billion pounds from 116.5 billion pounds.

In the first five months of the current fiscal year, the underlying deficit narrowed to 46.8 billion pounds from 50.5 billion pounds, with revenue boosted by payments of stamp duty, the ONS said. Receipts and spending both rose by almost 3 percent.

The figures exclude coupon payments from the Bank of England’s Asset Purchase Facility and the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets in April 2012.

In August, the BOE transferred 3.9 billion pounds of coupon income, although none of it counted toward net borrowing as the 12.3 billion-pound ceiling permitted under European Union rules for the current fiscal year had already been reached in July.

Cash measures of the public finances continue to receive the full benefit. There was a public-sector cash surplus of 3 billion pounds in August. Central government, which excludes state-owned banks, posted a deficit of 9.1 billion pounds. Net debt was 1.19 trillion pounds, or 74.6 percent of GDP. That’s up from 71.5 percent a year ago.

Before it's here, it's on the Bloomberg Terminal.