UK faces new blow to deficit-reduction plans, over use of central bank income
By David Milliken and William Schomberg | February 21, 2013 10:56 PM EST
British Chancellor George Osborne faces a new barrier to meeting his budget goals, after statisticians said on Thursday that interest income from the Bank of England that can be used to reduce the fiscal deficit would be less than forecast.
That left economists divided on whether Osborne would manage to meet his 2012/13 deficit-reduction goal when he presents new forecasts at his March 20 budget. Data on Thursday showed some improvement in public finances in January, but possibly not enough to make up for heavy borrowing earlier in the tax year.
Deficit reduction is the central economic policy of Britain's Conservative-led coalition, which came to power in May 2010 when Britain's budget deficit was more than 11 percent of annual economic output.
That was one of the highest for a major economy and the government's struggle to reduce high borrowing has put the UK's prized triple-A credit rating at risk.
The government's preferred borrowing measure showed a stronger reading in January than a year earlier, according to data released on Thursday.
Public sector net borrowing, stripping out some of the effects of UK bank bailouts, showed a surplus of 11.406 billion pounds ($17.45 billion) in January, the Office for National Statistics said.
That was up from a 6.435 billion pound surplus in January 2012, and well above analysts' forecasts of 8.15 billion.
However, January's figures were flattered by 3.8 billion pounds of income transferred from the Bank of England's 375 billion pound gilt holdings. But the benefit for the tax year as a whole from this source will be around 5 billion pounds less than the 11.5 billion pounds which the government's fiscal watchdog estimated in December, the ONS said.
While the full amount of transfers from the central bank - estimated at just over 11 billion pounds - will go towards reducing Britain's public debt, the ONS said that European Union statistical rules meant only some of it could be credited towards deficit reduction.
This is the second blow to Osborne's deficit-reduction plan in as many days, after an auction of next-generation mobile phone frequencies on Wednesday raised about 1 billion pounds less than its fiscal watchdog had forecast.
January's net borrowing figures also reflect seasonal inflows of income and corporation tax and mask a gloomier picture for the previous nine months.
"The underlying story isn't quite as good," said James Knightley, an economist at ING. "Indeed, the UK's AAA rating remains under threat and with economic activity remaining subdued and tax revenues disappointing, Chancellor Osborne has little wiggle room when he presents his annual budget next month."
Since the start of the tax year in April 2012, borrowing has totalled 93.8 billion pounds, excluding a one-off boost from the transfer of Royal Mail pension assets.
This is 1.6 percent higher than at the same point in the 2011/12 tax year, and Osborne is likely to face a tough task to meet a full-year target of 108.5 billion pounds - roughly 7 percent of GDP - down from 121 billion pounds in 2011/12.
GETTING BACK ON TRACK?
Nonetheless, the public finances are less off track than they were a month earlier, when total borrowing was around 7 percent higher than the same point the year before.
Economists were split on whether Osborne would manage to meet his 2012/13 deficit reduction goal when he presents new forecasts at his budget next month.
Investec economist Victoria Clarke said she suspected Osborne would still be off track, but not by enough for him to undertake the fundamental rethink of economic policy demanded by the Labour Party opposition.
"On these numbers, he is going to be having a bit of a scratch around to see whether there are any extra one-off savings, as we've seen him do over recent years," she said.
"But in general, it's not going to be enough of a miss of the OBR's forecast to encourage him to move away from what he would still class as 'Plan A'. So it will be business as usual for austerity and therefore that squeeze on the UK economy will continue," she said.
The finance ministry said Wednesday's figures showed that the road ahead would be hard, but the government was on the right track.
Osborne has already had to push back his main deficit-reduction goal by two years. While the government has largely been able to stick to plans to curb departmental spending, a weak economy that shrank for most of 2012 has depressed tax receipts and pushed up benefit costs.
Tax receipts for the year to date are up just 1.8 percent on a year ago, while social benefit spending is 5.9 percent higher and other spending - which is controlled more tightly by government departments - has risen by 2.6 percent.
Britain's total net public debt, excluding the direct costs of bailing out the country's banks, is also much higher than before the financial crisis at some 1.1628 trillion pounds or 73.8 percent of GDP, and is forecast to keep rising.
($1 = 0.6535 British pounds)
(Additional reporting by Olesya Dmitracova and Li-mei Hoang; Editing by Susan Fenton)
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