Osborne Needs Bumper First Quarter to Meet Deficit Target

  • Chancellor requires 5.3 billion-pound surplus to hit goal
  • Fiscal watchdog acknowledges scale of challenge facing Osborne

U.K. Chancellor of the Exchequer George Osborne requires the best end to a fiscal year for more than a decade to meet his deficit-reduction target, despite a better-than-forecast performance for the public finances in December.

A 7.5 billion-pound ($10.7 billion) budget shortfall last month, 3 billion pounds less than economists predicted, left borrowing in the first nine months of the fiscal year at 74.2 billion pounds, data from the Office for National Statistics showed on Friday.

George Osborne
George Osborne.
Photographer: Luke MacGregor/Bloomberg

It means Osborne needs a surplus of 5.3 billion pounds in the first three months of 2016 if he’s to meet his full-year target of cutting the deficit to 68.9 billion pounds. The last time such a feat was achieved was in 2002, when Gordon Brown was presiding over a revenue-generating economy in its 11th year of expansion. The first-quarter surplus in that year was 5.9 billion pounds.

Critical to the outcome is January, the biggest revenue month of the year as final payments of self-assessed income tax pour along with capital-gains and corporation tax. A 10 billion-pound surplus in January last year helped limit the first-quarter deficit to 3.9 billion pounds. If repeated this year, the 2015-16 budget shortfall would be about 78 billion pounds.

‘Considerable Uncertainty’

The deficit last month was down from 11.7 billion pounds a year earlier. Revenue climbed 3.6 percent, boosted by income-tax receipts and record stamp duty on property purchases. Revenue from company profits fell. Central-government spending fell 0.3 percent, with timing effects relating to payments to the European Union accounting for much of the decline.

In an analysis of Friday’s figures, the Office for Budget Responsibility acknowledged the scale of the improvement needed to avoid an overshoot of the projection it made in November.

“Our forecast does assume stronger growth in receipts in the remainder of the year, particularly self-assessment income tax and stamp-duty land tax,” the fiscal watchdog said. “But considerable uncertainty nonetheless remains over prospects for the rest of the financial year.”

Osborne, who inherited the biggest deficit in British peacetime, has staked his credibility on returning the country to surplus by the end of the decade by extending a five-year squeeze on spending. The OBR sees the deficit falling to below 4 percent of gross domestic product this year.

The cash measure used to calculate how much the Treasury needs to borrow in the financial markets showed a deficit of 20.5 billion pounds in December. It leaves the shortfall so far this fiscal year at 80.5 billion pounds against a full-year target of 75.5 billion pounds. Net debt was 1.54 trillion pounds, or 81 percent of GDP.

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