Lower UK borrowing still in sight despite surprise July deficit

LONDON Wed Aug 21, 2013 12:00pm BST

A man speaks on his phone outside a government department in London July 5, 2010. REUTERS/Luke MacGregor

A man speaks on his phone outside a government department in London July 5, 2010.

Credit: Reuters/Luke MacGregor

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LONDON (Reuters) - Britain's public finances showed an unexpected deficit in July, although a recovering economy means the government still looks likely to meet its goal of reducing borrowing this fiscal year.

Public borrowing on the government's preferred measure, which excludes some of the effects of bank bailouts, swung to a deficit of 62 million pounds from a surplus of 823 million in July 2012, the Office for National Statistics said on Wednesday.

This was the first shortfall for that month - which typically shows a surplus due to tax payments - since 2010 and compared with forecasts for 2.45 billion pounds in the black.

It marks a blip in the deficit reduction plans that lies at the heart of the coalition government's economic policies. When it came to power three years ago, Britain's budget deficit was 11 percent of annual output - one of the highest for a major economy.

But a growth upturn - illustrated on Wednesday by an industry survey showing British manufacturers' order books looked in their best shape for two years in August - suggests the programme remains on schedule.

"The fiscal forecast for this year and next at the least are based on what now looks like pretty weak growth forecasts...," said Rob Wood, chief UK economist at Berenberg Bank.

"Growth could well come in much higher than those numbers."

SPENDING SURGE

Government receipts excluding 0.4 billion pounds from the Bank of England rose 3.4 percent on the year in July, while spending grew 3.7 percent.

"The biggest problems appear to be at the moment on the spending side," said Peter Dixon, economist at Commerzbank.

"But I think all in all, it's only a very small deficit... At this stage, we are probably on track to meet the government's forecasts for the year as a whole."

Stripping out one-off cash transfers from the central bank and Royal Mail, public borrowing totalled 36.8 billion pounds in the first four months of the 2013-14 tax year, up slightly from a year earlier.

On this underlying basis, ministers are aiming for a deficit of no more than 120 billion pounds or 7.5 percent of GDP this tax year.

Analysts said tax inflows should improve as the year went on, with the economy showing growing signs of life.

The ONS said only 0.4 billion pounds of the 5.3 billion return of interest paid to the bank on its gilt holdings affected net borrowing, although the net cash requirement benefited from the July transfer in full.

Borrowing in the fiscal year to date jumped to 24.706 billion pounds from 7.190 billion in the same four months a year ago.

(Additional reporting by Paul Sandle; Editing by John Stonestreet)

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