Bloomberg News

U.K. Budget Deficit Narrows as Osborne Faces Economic Test

April 23, 2013

U.K. Budget Deficit Narrows as Osborne Faces Stewardship Test

Figures this week are forecast to show Britain only narrowly avoided a third recession in five years. Photographer: Paul Thomas/Bloomberg

Britain’s budget deficit narrowed more than economists forecast in March as capital spending fell, providing a boost for Chancellor of the Exchequer George Osborne as he faces new questions over his economic management.

The shortfall excluding temporary support for banks was 15.1 billion pounds ($23 billion), compared with 16.7 billion pounds a year earlier, the Office for National Statistics said in London today. The median forecast in a Bloomberg News survey of 23 economists was for a deficit of 15.5 billion pounds.

Figures this week are forecast to show Britain narrowly avoiding a third recession in five years, according to the median of 20 economist estimates collected by Bloomberg. The data may add to pressure on Osborne less than a week after Fitch Ratings stripped the U.K. of its top credit grade and the International Monetary Fund urged him to ease the pace of deficit reduction. In the fiscal year that ended March, the deficit narrowed to 120.6 billion pounds from 120.9 billion pounds a year earlier.

“The rate of improvement in 2012/13 makes a snail look fast, but at least the chancellor can say the finances moved in the right direction,” said Howard Archer, an economist at IHS Global Insight in London. The figures, though, are “unlikely to take the heat off and he faces another very difficult year ahead of both the growth the public finance fronts.”

Tax and Spending

Tax income fell 5.7 percent in March from a year earlier. Income-tax receipts dropped 12 percent and interest and dividends plunged by a half, reflecting a revenue boost a year earlier stemming from the reorganization of Britain’s social- housing stock. Spending dropped 4.7 percent. Net investment declined to 4.6 billion pounds from 7 billion pounds.

The pound remained weaker against the dollar after the data were released. It was trading at $1.5220 as of 11:30 a.m. in London, down 0.5 percent from yesterday. Gilts rose, pushing the 10-year yield down 2 basis points to 1.63 percent.

In the latest fiscal year revenue and spending both rose 1.8 percent. The overall budget shortfall, equal to 7.8 percent of gross domestic product, was in line the Office for Budget Responsibility’s forecast last month.

The figures exclude the 28-billion-pound transfer of Royal Mail Group Ltd. pension assets and 6.4 billion pounds of gilt- coupon income from the Bank of England’s bond-buying program.

Debt Sales

EU accounting rules restrict the amount of coupon income the Treasury can count against net borrowing, though cash measures of the public finances receive the full benefit. In March, the central bank paid a third 3.8 billion-pound installment.

The public-sector cash requirement was 31.3 billion pounds, the highest for any March since records began in 1984. The central government cash requirement was 109.5 billion pounds in the 2012-13 fiscal year, 7.1 billion pounds higher than the OBR forecast last month. The Debt Management Office announced after the figures it was increasing planned debt sales for 2013-14 by 6.7 billion pounds, with 4.7 billion pounds coming from gilt issuance.

The Treasury said in a statement that while the government is fixing the country’s economic problems, it is taking time.

The lack of economic growth has undermined efforts to cut a deficit that stood at a record 11.2 percent of GDP when Prime Minister David Cameron took office almost three years ago by sapping tax revenue and pushing up spending on welfare.

Missed Goals

OBR forecasts last month show the government borrowing 160 billion pounds more by April 2015 than had been forecast in June 2010, forcing the government to miss its target of balancing the structural budget deficit within five years.

Fitch on April 19 became the second ratings company to strip Britain of its top grade, citing a gross debt burden it estimates will peak at 101 percent of GDP in 2015-16 compared with 74 percent in 2010. Two days earlier, the IMF cut its 2013 growth outlook to 0.7 percent and urged Osborne to consider easing his austerity program.

The U.K. economy probably grew 0.1 percent in the first quarter, meaning it avoided an unprecedented triple-dip recession after contracting 0.3 percent in three previous months, Bloomberg forecasts show.

Britain has recovered little more than half of the output lost during the financial crisis, lagging behind every other Group of Seven nation bar Italy. The government blames the debt crisis in the euro region, the biggest market for British exports. The opposition Labour Party says Osborne has made the situation worse by trying to cut the deficit too quickly.

Today’s figures showed net debt climbed to 75.4 percent of GDP in March, or 1.19 trillion pounds. It is forecast by the OBR to peak at 85.6 percent of GDP in 2016-17, three years later and 345 billion pounds higher than first envisaged.

European Union figures yesterday showed gross government debt rose to 90 percent of GDP in 2012, compared with an EU average of 85.3 percent and up from 85.5 percent in 2011.

To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editors responsible for this story: James Hertling at


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