Public finances deteriorate sharply in Jan

LONDON Thu Feb 18, 2010 10:32am GMT

Evening commuters are seen in central London March 18, 2009. REUTERS/Toby Melville

Evening commuters are seen in central London March 18, 2009.

Credit: Reuters/Toby Melville

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LONDON (Reuters) - Britain posted its first budget deficit for the month of January on record after government spending shot up and tax receipts dived following the worst recession in decades, official data showed on Thursday.

The Office for National Statistics said public sector net borrowing, the government's preferred measure, came in at 4.339 billion pounds last month compared with a five billion pounds repayment a year ago.

That marked the first PSNB borrowing for a January since records began in 1993.

January is traditionally a big surplus month for the public purse due to deadlines for self-assessed income tax and corporation tax. Analysts had forecast a surplus of 2.8 billion pounds.

The pound weakened against the dollar and euro and government bond prices fell after the figures exacerbated existing concerns about Britain's fiscal position.

The government is already issuing a record amount of gilts this year.

Worries about the budget deficit -- set to hit a record above 12 percent of gross domestic product this fiscal year -- have raced up the political agenda with an election expected on May 6.

The Conservatives, favourites to win, have warned that Britain may lose its top credit rating and the pound could suffer unless more stringent action is taken to curb the deficit than the Labour government has pencilled in.

Labour argues that going beyond its plans to halve the deficit over four years could derail Britain's fragile economic recovery.

GREEK PARALLEL?

"For now, the markets and credit ratings agencies seem prepared not to put the UK in the same category as the fiscally-challenged euro zone economies like Greece," said Jonathan Loynes, an economist at Capital Economics.

"But with the budget deficit heading towards 13 percent 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."

A Treasury spokesman said the latest figures were in line with forecasts made in December's pre-budget report and were weak because they reflected just how bad conditions were for businesses and consumers at the height of the recession.

The cumulative PSNB for April -- when Britain's tax year begins -- to January came in at 122 billion pounds, the highest on record, versus a full-year government forecast of above 170 billion pounds.

Britain's debt burden now stands at 59.9 percent of gross domestic product. The ONS said the interest the government pays on its debt leapt by half in January.

The cash-based measure of the public finances -- the PSNCR -- posted a net repayment of 11.770 billion pounds last month compared with a 24.853 billion pound surplus in the same month last year.

That was the lowest repayment for a January since 2003. Analysts had forecast a 20 billion pound surplus.

The ONS said the deterioration was due to central government current receipts falling sharply as both income tax and capital gains tax inflows dropped markedly.

"These figures emphasise the scale of the fiscal challenge facing the next government," said Andrew Goodwin at Ernst & Young. "The current (government) forecasts are far too optimistic, both in terms of the speed of recovery and the extent to which tax revenues will recover, and it is clear the major additional tightening will be required." (Editing by Mike Peacock)

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