LONDON (Reuters) - The government looked on track to meet this year’s deficit-cutting goal after it borrowed slightly less than expected in October, but a much weaker economic outlook could thwart its efforts to balance the books by 2015.
Figures published a week before Chancellor George Osborne presents his autumn budget statement to parliament showed October public sector net borrowing excluding financial interventions fell 16 percent on the year to 6.498 billion pounds.
However, Prime Minister David Cameron warned on Monday that cutting borrowing was proving to be more difficult than he expected, and strongly rejected calls from the opposition Labour Party for fiscal stimulus to boost faltering growth.
This commitment to reduce the deficit is a major reason why Britain’s government debt is still viewed as a safe haven asset like Germany‘s, despite the UK having a far bigger deficit.
The government’s flagship policy to eliminate a budget deficit of 10 percent by 2015 was based on the assumption that the economy would grow by 1.7 percent this year and 2.5 percent in 2012.
Economists say the government may yet meet its target to cut its budget deficit to 122 billion pounds in 2011/12, but the deteriorating economic outlook means it is likely to have to raise its borrowing forecasts for the next few years and miss its goal to balance the budget by 2015.
The Office for Budget Responsibility, the independent fiscal watchdog which produced the forecasts, is likely to have to halve its growth predictions when it publishes its latest projections on November 29, alongside Osborne’s statement.
“The full effects of the economic slowdown have not yet been felt,” said Samuel Tombs of Capital Economics. “We continue to expect the OBR to revise up its forecasts for borrowing in future years significantly ... casting serious doubt on whether the government can meet its fiscal objectives without further austerity measures.”
The Office for National Statistics said borrowing in the fiscal year to date fell 13 percent on the year to 68.314 billion pounds, as tax revenue growth outpaced increases in spending.
The finance ministry said the figures showed it was making progress in cutting the deficit, but warned of the risks ahead.
Analysts said that while Tuesday’s figures suggested the government was in line with its debt cutting goals so far, the economy’s recent weakness had yet to show up in the public finances.
“This could be the calm before the storm,” said Deutsche Bank economist George Buckley. “The OBR is set to revise its GDP view down sharply for 2011/12. The impact on future deficits could be sizeable.”
Indeed, Tuesday’s data already contained signs that lacklustre growth may already be having an impact on the public finances. October is usually a month when the government’s cash receipts are boosted by strong corporation tax revenues. But this time receipts were down 7 percent on the year.
The OBR blamed the decline on weaker bank profits, as financial institutions took a hit from their exposure to euro zone sovereign debt. Tax revenues from oil and gas producers were down due to output disruptions from unusually extensive maintenance this year.
Public sector net debt as a percentage of GDP came in at 62.3 percent -- a record for the month of October.
The Labour Party leapt has been arguing that the government’s austerity drive is choking growth, and urged it to ease up on the pace of cuts and do more to drive the economy.
But Conservative Prime Minister Cameron slapped down those calls on Monday.
“People who argue that traditional fiscal stimulus, extra spending funded by even more borrowing, is the right answer are not just wrong, but dangerously wrong,” he said.