Bloomberg News

U.K. Budget Surplus Swells, Boosted by BOE Gilt Income

February 21, 2013

U.K. Chancellor of the Exchequer George Osborne

George Osborne, U.K. chancellor of the exchequer. Photographer: Chris Ratcliffe/Bloomberg

Britain saw its budget surplus widen in January as the Treasury received the first payment of gilt- coupon income from the Bank of England’s quantitative easing program.

The surplus excluding government support for banks was 11.4 billion pounds ($17.4 billion) compared with 6.4 billion pounds a year earlier, the Office for National Statistics said in London today. The Bank of England transferred 3.8 billion pounds to the Treasury on Jan. 7, the statistics office said. Britain usually posts a surplus in January as taxes on company profits and personal incomes pour in.

“There is a modest trend improvement in the public finance figures, but until we’ve got past all these weird and wonderful one-offs, we can’t get an accurate picture of what’s really going on,” Peter Dixon, an economist at Commerzbank AG in London, said in a telephone interview. “Weakness in the economy will continue to constrain the government’s ability to bring down the deficit as fast as they’d like.”

The pound and government bonds have plunged this year as Chancellor of the Exchequer George Osborne struggles to meet his deficit targets. The economy stands on the brink of a triple-dip recession and speculation is growing that Britain will lose its top credit rating. The opposition Labour Party says Osborne should use his March 20 budget to boost an economy that has barely grown since he took office almost three years ago.

Weak Taxes

The pound, close to its weakest against the dollar since July 2010, climbed 0.1 percent in London today and was trading at $1.5252 as of 12:44 p.m. in London. Ten-year gilt yields fell 6 basis points to 2.13 percent. The Debt Management Office sold an additional 2.25 billion pounds of 10-year gilts at an average yield of 2.147 percent, the highest since May. The U.K. last sold 10-year bonds on Jan. 22 at an average yield of 1.897 percent.

While government income increased 7.3 percent in January from a year earlier, corporation-tax receipts dropped 13 percent, reflecting the impact of a weak economy on company profits. Spending increased 4.1 percent, today’s figures showed.

In the first 10 months of the fiscal year, the deficit climbed to 93.8 billion pounds from 92.3 billion pounds a year earlier. The figures exclude a one-time boost from the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets. If the boost from the Bank of England and other accounting changes were also stripped out, the deficit so far this fiscal year would be more than 5 billion pounds higher than a year earlier.

Spectrum Sale

Osborne’s target of holding the underlying deficit to 120.3 billion pounds for the full fiscal year was further undermined yesterday after the government auction of fourth generation mobile spectrum raised 2.3 billion pounds rather than the 3.5 billion pounds expected by his fiscal watchdog. The money is expected to be paid in February and be reflected in the public finance figures for the month, due in March.

Outlining how it plans to treat the coupon-income agreement, announced in November, the statistics office said net borrowing will be 6.4 billion pounds lower in the fiscal year through March than it would have been without the transfer.

The transfer will reduce borrowing in the next fiscal year by an estimated 12 billion pounds, it said. The effect on net debt in January was 3.8 billion pounds, lowering the total to 1.16 trillion pounds, or 73.8 percent of gross domestic product. Over 2012-13 as a whole, the program will reduce net debt by 11.3 billion pounds.

Debt Pile

As of the end of December, net debt jumped to 1.18 trillion pounds, or 75.2 percent of GDP, as a result of Bradford & Bingley Plc and Northern Rock Asset Management being transferred to the central government. The nationalized mortgage lenders add about 70 billion pounds of liabilities. As the two entities make small profits, the change reduced net borrowing by 670 million pounds in 2011-12 and 740 million pounds in the previous fiscal year.

The Office of Budget Responsibility has estimated the transfer of gilt income will continue to boost Treasury coffers through March 2017. This will reverse as quantitative easing is unwound and the Bank of England sells gilts for less than their purchase price, forcing the Treasury to cover the losses.

Standard and Poor’s in December became the third ratings company to warn that Britain could be stripped of its top-notch ranking after Osborne conceded it is taking longer than planned to repair the public finances. While investors often ignore such actions, a downgrade would be embarrassing for Osborne and Prime Minister David Cameron, who made Britain’s AAA ranking a symbol of economic virility during their early days in office.

‘Targeted’ Measures

The Bank of England’s Monetary Policy Committee has called for more “targeted” measures to fuel the economic recovery, and said these may need to be deployed by government officials outside of the central bank, according to minutes of the Feb. 7 policy decision published yesterday. The economy shrank 0.3 percent in the fourth quarter.

“The smoke and mirrors employed by the chancellor to get the recorded deficit down show a degree of desperation,” Rob Wood, an economist at Berenberg Bank and a former Bank of England official, said in a research note. “The economy is flat-lining and that is hurting tax receipts and deficit reduction. We continue to think the U.K. will probably lose its AAA credit rating this year with at least one rating agency.”

The pound has slumped 5.1 percent this year, the second- worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. Only the yen has weakened more. Gilts handed investors a loss of 2.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1.7 percent and Treasuries fell 0.9 percent.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net


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