LONDON (Reuters) - Britain’s budget deficit last month hit a record high for the month of August as higher inflation forced the government to shell out nearly three times more in interest payments than it did last year.
But the official figures released on Tuesday also showed the government enjoyed a bigger than expected windfall from its tax on bank bonuses, and the broader trend remains for the deficit to fall as the economy recovers and the Treasury implements huge spending cuts from next year.
The government’s tough talk on expenditure cuts has reassured investors, driving Gilt yields to record lows even as worries about peripheral euro zone debt have weighed on confidence elsewhere.
The Office for National Statistics said public sector net borrowing came in at 15.302 billion pounds in August, well above analysts’ forecasts for a reading of 12.5 billion pounds and some 1.8 billion pounds up on the year.
Analysts described the figures as disappointing, though a pick-up in receipts over the last few months and revenues of around 3.5 billion from the bank bonus tax means the budget deficit for the fiscal year so far is running well below year-ago levels.
“There are some positive revisions to back data, so overall it does not look like the public finances will be blown off course for the year as a whole,” said Philip Shaw, economist at Investec.
Still, the Conservative/Liberal Democrat coalition government will have its work cut out to meet its goal.
It has said it will cut spending significantly over the next four years, with most government departments expected to have to slash expenditure by 25 percent or more — measures that are expected to cost hundreds of thousands of public sector jobs.
Chancellor George Osborne will detail exactly where the axe will fall on Oct 20, and the Treasury said on Tuesday that the higher than expected August numbers underlined the need to push ahead.
“The government has a massive task on its hands to regain control over the public finances and we keenly await next month’s Comprehensive Spending Review to see how their plans for cutting spending stack up,” said Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club.
Osborne plans to virtually eliminate Britain’s budget deficit over the next five years and has said that dramatic measures are needed to safeguard the nation’s sovereign debt rating and maintain investors’ confidence.
Britain’s budget deficit is almost twice as high as Germany’s and significantly higher than that of France. But the Office for Budget Responsibility, an independent fiscal watchdog established in May, forecasts that government borrowing will fall to 149 billion pounds in 2010/11 from 154.7 billion pounds, some 11 percent of GDP, last year.
Tuesday’s data showed that PSNB excluding financial sector interventions — the government’s preferred measure on which its fiscal forecasts are based — came in at 15.9 billion pounds last month, also a record for the month of August and nearly 2 billion pounds up on a year ago.
But that still took borrowing on this measure for the April-August period down to 58.1 billion pounds from 61.9 billion pounds a year ago, and analysts said the full-year borrowing prediction was still in reach.
“The forecasts remain plausible after the figures today,” said David Tinsley, economist at National Australia Bank.
The ONS said the deterioration in August versus last year was mainly due to higher interest payments on index-linked gilts as a result of the rise in the retail price index.
This had shot up by some 2.5 billion pounds to 3.8 billion pounds after last year’s outturns were artificially low because the RPI inflation index had been in negative territory for most of 2009.
However, it also revised up back-data on receipts to show the extra tax on bank bonus payments implemented by the previous Labour government had pulled in 3.5 billion pounds, around 1 billion more than it had previously thought.
Ratings agency Moody’s reaffirmed Britain’s triple-A rating on Monday, but Standard & Poor’s still has a negative outlook for UK debt and bond investors are keeping a close eye on the government’s spending plans.
Editing by Hugh Lawson