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U.K. unexpectedly registered a budget deficit in January, the first for the month since records began in 1993. Government expenditure exceeded income despite the restoration of the value added tax to 17.5% at the start of the year.
Public sector net borrowing or PSNB was GBP 4.3 billion in January, the Office for National Statistics reported Thursday. A net lending of GBP 5.3 billion was recorded during the same period last year. Economists had expected a surplus of GBP 2.6 billion for January. In December, the borrowing figure stood at GBP 13.97 billion.
Public finances figures underline the need for more decisive action to improve the fiscal position when the economy is strong enough to withstand it, Capital Economics' Jonathan Loynes said. The economist noted that the outturn of a GBP 4.3 billion deficit has dashed any hopes that the worsening trend in the public finances might finally be easing a bit. Extrapolating the trend forward, full year borrowing would be around GBP 180 billion, Loynes assessed.
The cumulative PSNB was GBP 122.4 billion for April to January 2010. The Pre-Budget Report forecast for 2009/10 is net borrowing of GBP 178 billion. Accountancy consultancy firm PricewaterhouseCoopers reckoned that the budget deficit for 2009/10 would be around GBP 175 billion, close to the Treasury forecast.
"Even if the Treasury more or less hits its budget deficit forecast for 2009/10, however, this would still leave borrowing at a post-war record as a share of GDP," John Hawksworth, head of macroeconomics at PricewaterhouseCoopers said. The firm pointed out that there remains a large structural deficit to be tackled and this would possibly require further tax rises and real spending cuts once the recovery is secure.
The public sector net cash requirement was negative GBP 11.8 billion, which was GBP 13.1 billion higher net cash requirement than a year ago. The public sector current budget was in GBP 1.2 billion surplus in January, sharply smaller than the GBP 10.2 billion surplus seen in January 2009.
At the end of January 2010, public sector net debt was GBP 848.5 billion, equivalent to 59.9% of GDP compared to net debt equivalent to 50% of GDP in the same period last year.
In a letter to the Sunday Times, 20 leading economists had urged the government to cut public spending. Economists said the government should develop a detailed plan to cut the deficit more quickly than Chancellor Alistair Darling set out. The spending cuts should begin this year, they said.
Darling maintains that reducing spending too soon would put the recovery at risk. He told BBC Radio 4's Today programme that the reduction in the budget deficit faster than he planned will pose risk to the economic recovery.
As the budget deficit heads towards 13% of GDP this year, and perhaps exceeding that of Greece, it is clear that a more credible plan to restore the public finances to health will be required shortly after the general election to keep the markets and rating agencies at bay, said Capital Economics' Loynes.
David Kern, chief economist at British Chambers of Commerce said, "The worse than expected January figures further emphasis the dangers facing Britain's international credit rating." The public finances are always in surplus in January due to large seasonal tax revenue, he said, but the deficit this year reinforces the need for credible and specific deficit-cutting measures in next month's Budget.
Britons claiming unemployment benefits in January increased unexpectedly by 23,500 to the highest level in nearly thirteen years. The claimant count rate remained at 5%.
Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, noted that the latest labor market figures suggest that social benefit payments will remain high for some time to come. With these parts of public spending likely to remain high for the foreseeable future and the main parties promising to protect front-line services, this emphasises how difficult it will be to rein in spending after the election.
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