U.K. Starts New Fiscal Year With Surprise Borrowing Increase

  • Inflation depresses VAT receipts, pushes up debt costs
  • 2016-17 gap revised down but borrowing seen rising this year

Britain recorded a larger-than-forecast budget deficit in the first month of the new fiscal year as accelerating inflation pushed up debt costs and depressed consumer spending.

Net borrowing was 10.4 billion pounds ($13.5 billion) in April, the highest for the month since 2014 and up 1.2 billion pounds from a year earlier. Economists surveyed by Bloomberg predicted an 8.7 billion-pound gap. Government revenue rose 3.9 percent and spending increased 5.9 percent.

The figures from the Office for National Statistics Tuesday also showed that the shortfall in the latest fiscal year narrowed to 48.7 billion pounds instead of 52 billion pounds as previously estimated. It left the deficit at 2.5 percent of gross domestic product, the lowest for a decade.

Borrowing last year was brought down by a number of one-time factors, and officials expect the deficit this year to widen to 58 billion pounds. That forecast remains subject to more uncertainty than usual as Britain faces a general election, the start of Brexit talks and an economic slowdown.

Household incomes are being eroded by accelerating inflation and the squeeze is already making its mark on the public finances, with VAT receipts rising just 0.2 percent from a year earlier. That’s the weakest growth since August and tallies with figures showing a slowdown in retail sales over the past few months.

Income tax rose 1.4 percent and stamp duty on property purchases fell 15 percent. Spending was driven by a 40 percent jump in debt-interest costs to 7.2 billion pounds, probably reflecting the impact of faster inflation on index-linked government bond payments.

More Austerity

Chancellor of the Exchequer Philip Hammond has set a target of 2025 to erase the budget deficit, which remains high compared with other advanced economies. Only Spain, France, Japan and the U.S. had higher deficits last year. It means Britain will have had 15 years of austerity since borrowing peaked at almost 10 percent of GDP in the aftermath of the financial crisis.

While the new target is similar to one made in the last parliament, there is speculation that Hammond could raise taxes in order to achieve it after the Conservatives last week dropped pledges not to raise income tax and national insurance in their manifesto for the June 8 election.

The cash measure used to calculate how much the Treasury needs to borrow in the financial markets was in surplus by 15.2 billion pounds in April. Revenue was boosted by the sale of 11.8 billion pounds of Bradford & Bingley loans to Prudential Plc. Underlying net debt fell to 79.5 percent of GDP, the lowest since May 2014.

The revision to net borrowing in the latest fiscal year left the deficit below the 51.7 billion pounds forecast by the Office for Budget Responsibility in March. It came as a result of higher VAT and lower spending than previously estimated.

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