Bloomberg News

U.K. Budget Deficit Narrows More Than Forecast as Cuts Bite

October 21, 2011

(Updates with economist comment in fourth paragraph, pound in fifth, Treasury in 10th.)

Oct. 21 (Bloomberg) -- Britain’s budget deficit narrowed more than economists forecast in September as Chancellor of the Exchequer George Osborne’s spending cuts took effect in earnest.

Net borrowing excluding support for banks fell to 14.1 billion pounds ($22 billion) from 15.4 billion pounds a year earlier, the Office for National Statistics said in London today. A shortfall of 15 billion pounds was predicted by economists, based on the median of 17 forecasts in a Bloomberg News survey. Revenue rose 4.2 percent and spending climbed just 0.5 percent.

The figures still leave Osborne little room to provide a fiscal stimulus, with economists predicting he may overshoot his 122 billion-pound target for the fiscal year through March 2012 by as much as 8 billion pounds as the economy weakens. The Office for Budget Responsibility will publish its revised forecasts on Nov. 29.

“Obviously these figures are quite a lot better than people were expecting,” said Marc Ostwald, a bond strategist at Monument Securities in London. “There are signs that Osborne is having some success in reining in government spending. So the plan is working, but that may be a double-edged sword because of the effects on growth.”

The pound was little changed after the report and was trading at $1.5778 as of 9:45 a.m. London time.

Credibility

Osborne and Prime Minister David Cameron have staked their credibility on wiping out a budget deficit of more than 9 percent of economic output, leaving the Bank of England to stimulate demand by pumping more money into the economy.

Output has barely grown over the past year and unemployment climbed to a 15-year high of 8.1 percent in the three months through August. That’s fuelled opposition calls for emergency tax cuts to prevent the economy sliding back into recession.

The 80 billion-pound program of spending cuts will see more than 300,000 public-sector jobs eliminated by 2015 -- a third of the cuts have already taken place -- and deep reductions to welfare benefits. Only Greece, Ireland, Portugal and Iceland face a tighter fiscal squeeze among advanced economies, according to the International Monetary Fund.

In the first six months of the fiscal year, the deficit was 63.5 billion pounds compared with 71 billion pounds a year earlier. August’s deficit was 2.2 billion pounds lower than previously estimated, due to revisions to spending and income tax.

Delivering

Osborne is delivering on his deficit-reduction plan, the Treasury said. “At the halfway point in the fiscal year, half of the fall in borrowing forecast for the whole year has been achieved,” it said in statement released in London.

Osborne is aiming to cut borrowing by 15 billion pounds in the current fiscal year from 137.1 billion pounds last year.

Revenue in the first half rose 4.9 percent from a year earlier, behind the 7.2 percent predicted for the full fiscal year by the OBR, which oversees forecasting for the Treasury. Spending climbed 2.9 percent, less than the OBR’s 3.6 percent forecast for the year.

The deficit in September including government support for banks was 11.4 billion pounds. The public sector net cash requirement was 19.9 billion pounds, boosted by record September interest payments on government debt. A cash deficit of 18 billion pounds was predicted by analysts. Net debt climbed to 966.8 billion pounds, or 62.6 percent of GDP.

--Editor: Andrew Atkinson

To contact the reporter on this story: Jennifer Ryan in London Jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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