Surprise July deficit threatens UK austerity plans

LONDON, Aug 21: Britain’s government finances veered further off track in July after a shortfall in corporation tax revenues and higher spending led to an unexpected deficit in a month that normally has strong tax  receipts.
After nine months of recession, the unexpected deficit underscored that finance minister George Osborne has little room to give the economy a meaningful boost.
The official data cast further doubt on the coalition government’s plan to defend Britain’s top AAA credit-rating and hold down borrowing costs by cutting its budget deficit.
The public sector finances excluding financial sector interventions – the government’s preferred measure – showed a deficit of 557 million pounds ($875 million), compared with a 2.8 billion pound surplus in July 2011, the Office for National Statistics said on Tuesday.
‘At this rate, borrowing for 2012/13 overall will massively overshoot the Office for Budget Responsibility’s forecast,’ said Vicky Redwood, economist at Capital  Economics.
‘With the recovery falling well short of the OBR’s expectations, we think that the government will struggle to cut borrowing at all next year either,’ she added.
The coalition government of Conservatives and Liberal Democrats aims to cut the budget deficit to 5.8 percent of gross domestic product this year from 8.2 percent of GDP in the 2011/12 fiscal year.
For the year to date, public sector net borrowing – excluding financial sector interventions and the one-off boost earlier in the year from a transfer of Royal Mail pension assets to the public sector – totalled 47.2 billion pounds, up 11.6 billion from 2011.
When including the Royal Mail transfer, the figure for the fiscal year to date totals 16.9 billion pounds compared with 35.6 billion between April and July 2011.

The coalition has made the reduction of Britain’s record deficit the corner stone of their policies, but calls to soften the austerity drive have been growing due to the weak economy.
The finance ministry said that while it would continue to allow so-called automatic stabilisers – mostly benefit payments and lower tax demands – to support the economy, Tuesday’s figures showed there was no scope for deficit-financed spending.
‘The government remains committed to the credible plan we have set out to deal with Britain’s debts, and today’s numbers emphasise how risky it would be to deliberately increase borrowing,’ a finance ministry spokesman said.
Britain’s public finances are highly seasonal, and July typically shows a surplus due to inflows of income tax and corporation tax payments, but this year the North Sea oil and gas output has been unusually low.
The government had originally planned to eliminate the structural budget deficit by 2015 with a tough programme of spending cuts and tax rises.
But the weak economy has forced it to extend the planned fiscal consolidation by another two years and Prime Minister David Cameron has warned austerity could last until 2020.
Last month, the International Monetary Fund said Britain could need to cut taxes or boost investment spending to support growth if the economy has not picked up by early next year.
So far, finance minister Osborne has focused on schemes to lower banks’ funding costs to get credit flowing, as well as guarantees to support infrastructure investment without spending taxpayers’ money directly. Measures to support house-building are expected next month.
Tuesday’s data showed that government receipts in July fell 0.8 percent on the year, driven by a near 20 percent drop in corporation tax, while current spending grew 5.1  percent.
Lower revenues from oil and gas companies accounted for about 1 billion pounds of a 1.7 billion pound shortfall in corporation tax compared to last year.


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