U.K. May Budget Deficit Barely Narrows as Taxes Disappoint

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  • Figures cast fresh doubt on Osborne’s deficit-cutting plans
  • Chancellor has warned Brexit would create budget black hole

Britain’s budget shortfall barely narrowed in May, underlining the challenge facing Chancellor of the Exchequer George Osborne to achieve his deficit-reduction goals.

Net borrowing was 9.7 billion pounds ($14.3 billion), compared with 10.1 billion pounds a year earlier, the Office for National Statistics said in London on Tuesday. The median forecast in a Bloomberg survey was for a 9.5 billion-pound deficit. It left the budget gap in the first two months of 2016-17 marginally wider on the year.

The figures come amid warnings about the damage a vote to quit the European Union would do to the public finances. With the referendum just two days away, Osborne has said he’d need an emergency budget to fill a 30 billion-pound hole if Britain leaves. Pro-Brexit campaigners insist the economy would thrive outside the bloc.

Even if Britain remains in the EU, Osborne may struggle to meet his target of cutting the deficit in the current fiscal year to 55.5 billion pounds -- 2.9 percent of economic output -- as slowing growth hits tax income, according to Bloomberg Intelligence economists Jamie Murray and Dan Hanson. 

Weak Revenue

An upward revision to borrowing in April left the deficit in the first two months of the fiscal year at 17.9 billion pounds, compared with 17.8 billion pounds in the same period last year. While the 2015-16 shortfall was revised lower to 74.9 billion pounds, that’s still almost 3 billion pounds above what official forecasters had predicted in March.

“At this early stage in the fiscal year, there is sufficient scope for revisions to significantly alter the current picture,” said Sam Hill, senior U.K. economist at RBC Europe in London. “However, we are starting again from a point where the questions in the coming months are going to be about whether the economy is strong enough to generate the tax receipts the Treasury is relying on.”

Revenue posted only modest gains last month, with value-added tax rising 1.9 percent from a year earlier and income tax climbing 1.5 percent. Stamp duty on property purchases fell 5.5 percent after surging earlier in the year as buyers rushed to beat a tax hike that took effect in April. Weakness in overall tax revenue was partly limited by gains in corporation tax and social-security contributions.

The cash measure used to calculate how much the Treasury needs to borrow in the financial markets came in at 6 billion pounds in May. Net investment climbed by 300 million pounds to 1.9 billion pounds, while net debt rose to 1.61 trillion pounds, or 83.7 percent of gross domestic product.