Bloomberg News

Osborne Under Pressure as U.K. Budget Deficit Widens

May 22, 2012

Chancellor of the Exchequer George Osborne

Chancellor of the Exchequer George Osborne. Photographer: Chris Ratcliffe/Bloomberg

Britain’s underlying budget deficit widened to 13.8 billion pounds ($21.8 billion) in April, the first month of the fiscal year, as the economic slowdown subdued tax receipts.

The shortfall, which excludes government support for banks, compared with 9.1 billion pounds a year earlier, the Office for National Statistics said in London today. Revenue rose 1.3 percent and spending increased 3.8 percent.

The public finances received a one-time boost from the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets to the public sector and a further 2.3 billion pounds from a Bank of England lending program that closed at the end of January. This left a budget surplus of 16.5 billion pounds last month. A cash-based measure showed a surplus of 23.2 billion pounds.

“The Royal Mail factor shouldn’t be allowed to disguise what is a disappointing underlying story to start the 2012-13 fiscal year,” said Sam Hill, a gilt strategist at Royal Bank of Canada in London.

Tax revenue was depressed by 12 percent drop in corporation tax, suggesting the economy’s return to recession and the deepening euro-region debt crisis are weakening the outlook for company profits. Spending by government departments climbed 2.5 percent from a year earlier, while welfare payments rose 5.4 percent and interest payments on government debt increased 9 percent.

The takeover of the Royal Mail pension fund leaves the government responsible for its 8.4 billion-pound deficit as the state-owned postal service is readied for sale. While its assets are transferred immediately, liabilities worth 37.5 billion pounds will appear on the government books as they become due over the next two decades.

No Retreat

The move had the effect of reducing net debt in April by more than 16 billion pounds to 1.01 trillion pounds, or 64.8 percent of gross domestic product.

Prime Minister David Cameron has said there can be no retreat from his plan to erase the bulk of a deficit of 8 percent of GDP by 2017. While the Organization for Economic Cooperation and Development today backed the strategy, the International Monetary Fund said a fiscal stimulus including temporary tax cuts may be needed if the economy gets worse.

The pound fell for the first time in three days against the dollar after the IMF report and official figures showing U.K. inflation slowed more than economists forecast in April. Sterling declined 0.4 percent to $1.5768 at 12:03 p.m. London time. The 10-year government bond yield was little changed at 1.853 percent.

To contact the reporter on this story: Jennifer Ryan at jryan13@bloomberg.net

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


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