Bloomberg News

U.K. Deficit Narrows More Than Forecast on Spending Cuts

January 24, 2012

(Updates with economist comment in fourth paragraph, pound in fifth, Treasury statement in seventh.)

Jan. 24 (Bloomberg) -- Britain’s budget deficit narrowed more than forecast in December as government spending fell, suggesting Chancellor of the Exchequer George Osborne’s fiscal squeeze is gaining traction.

Net borrowing excluding support for banks was 13.7 billion pounds ($21.3 billion) compared with 15.9 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 17 forecasts in a Bloomberg News survey was 14.9 billion pounds.

Osborne has pledged to stick to his plans for the deepest cuts since World War II as European nations struggling to tame deficits see their credit ratings lowered. Tackling the budget deficit is being made harder by slowing economic growth, which is hitting tax revenue. Net debt rose above 1 trillion pounds last month for the first time since records began in 1993.

“The figures are better than expected and it looks like the chancellor will meet his forecasts,” said Philip Shaw, an economist at Investec Securities in London. “If we see a revival on the economy the plans will remain on track. If not, he’ll have to rethink.”

The pound eased against the dollar following the report and was trading at $1.5542 as of 9:45 a.m. in London, down 0.2 percent on the day.

Tax and Spending

Tax revenue rose 7.3 percent in December from a year earlier, boosted by a levy on bank balance sheets and taxes on corporate profits. Spending fell 0.9 percent, led by a squeeze on government departments where outlays dropped 4.4 percent.

In the first nine months of the fiscal year, the deficit was 103.3 billion pounds compared with 114.6 billion pounds a year earlier. Government revenue rose 5 percent and spending gained 1.5 percent. Osborne’s fiscal watchdog, the Office for Budget Responsibility, predicts the deficit will reach 127 billion pounds in the fiscal year as a whole.

The Treasury said the government is making “good progress” in cutting the deficit. “That our national debt has reached more than one trillion pounds simply shows the unsustainable level of spending this country built up over the past few years, and shows why it is critical for our nation’s future that we deal decisively with the deficit,” it said in a statement today.

Osborne raised his borrowing forecasts in November and conceded that spending cuts will have to continue beyond the 2015 general election for the government to meet its target of eliminating a deficit of 9 percent of economic output.

Recession Risk

The economy probably shrank 0.1 percent in the fourth quarter, according to the median of 33 forecasts, raising the prospect of a second recession in three years. The Office for National Statistics will publish its first estimate for the period tomorrow.

European Union finance ministers conclude two days of meetings today in Brussels as they try to craft a long-term plan to tackle the region’s debt crisis. On Jan. 13, France and Austria lost their top AAA credit ratings at Standard & Poor’s, which downgraded nine euro-area nations, saying crisis-fighting efforts are falling short.

Citigroup analysts Michael Saunders and Mark Schofield said last week the U.K. will retain its AAA grade because of the government’s commitment to reducing the budget deficit with 147 billion pounds of austerity measures planned by April 2017.

Today’s report shows the deficit including government support for banks was 10.8 billion pounds compared with 13.9 billion pounds a year earlier. There was a public-sector net cash requirement of 22.9 billion pounds, above the shortfall of 19 billion pounds that was predicted by analysts.

Net debt rose to 1 trillion pounds, equating to 64.2 percent of GDP. That’s up from 59.4 percent a year earlier.

--With assistance from Mark Evans in London. Editor: Andrew Atkinson

To contact the reporter on this story: Jennifer Ryan in London at

To contact the editor responsible for this story: Craig Stirling at

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