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UK government borrowing: what the economists say UK government borrowing: what the economists say
(40 minutes later)
A slump in corporate tax receipts pushed the exchequer into deficit in July, despite expectations of a surplus of £12.5bn. A slump in corporate tax receipts pushed the exchequer into deficit in July, despite expectations of a surplus of £2.5bn.
Gustavo Bagattini, RBC Capital Markets Gustavo Bagattini, RBC Capital Markets
It's the same story we've been seeing since the beginning of the year: that tax receipts are down, which is not surprising given the weaker growth performance of the economy. I think the other thing to remember is before this release we were already behind schedule in terms of borrowing for the year as a whole, so it does take in a risk for an upward revision to government borrowing requirements coming November. It probably means [that] come November the government is going to have to announce further fiscal tightening at that stage.It's the same story we've been seeing since the beginning of the year: that tax receipts are down, which is not surprising given the weaker growth performance of the economy. I think the other thing to remember is before this release we were already behind schedule in terms of borrowing for the year as a whole, so it does take in a risk for an upward revision to government borrowing requirements coming November. It probably means [that] come November the government is going to have to announce further fiscal tightening at that stage.
Philip Shaw, InvestecPhilip Shaw, Investec
[The figures] are poor. A couple of reasons for that: tax receipts have performed badly through the financial year and there's been a considerable drop in corporation tax inflows this time around, and the spending numbers are strong as well. Overall, it's becoming clearer that the weakness of the economy is having a material impact on the public finances and it certainly looks as if the OBR's forecasts for this year for borrowing will be overshot. It certainly puts the chancellor in a real dilemma with respect to whether he should turn on the taps for infrastructure spending. A big programme of investment would be a major risk. If the authorities become successful in stimulating the economy via monetary policy, that's the ideal way forward. But it's not clear that either QE or the Funding for Lending Scheme will be effective.[The figures] are poor. A couple of reasons for that: tax receipts have performed badly through the financial year and there's been a considerable drop in corporation tax inflows this time around, and the spending numbers are strong as well. Overall, it's becoming clearer that the weakness of the economy is having a material impact on the public finances and it certainly looks as if the OBR's forecasts for this year for borrowing will be overshot. It certainly puts the chancellor in a real dilemma with respect to whether he should turn on the taps for infrastructure spending. A big programme of investment would be a major risk. If the authorities become successful in stimulating the economy via monetary policy, that's the ideal way forward. But it's not clear that either QE or the Funding for Lending Scheme will be effective.
Vicky Redwood, Capital EconomicsVicky Redwood, Capital Economics
We should treat the figures with some caution. The ONS warns that the timing of self-assessment tax receipts can vary from year to year, so more receipts than usual might come through in August. And the drop in corporation tax reportedly partly reflected a drop in oil and gas receipts, due to the closure of the Elgin gas field. Nonetheless, a deterioration has been seen for several months now. Indeed, at this rate, borrowing for 2012/2013 overall will massively overshoot the OBR's forecast of £120bn (excluding Royal Mail effects) by over £35bn. And with the recovery falling well short of the OBR's expectations, we think that the government will struggle to cut borrowing at all next year either. We should treat the figures with some caution. The ONS warns that the timing of self-assessment tax receipts can vary from year to year, so more receipts than usual might come through in August. And the drop in corporation tax reportedly partly reflected a drop in oil and gas receipts, due to the closure of the Elgin gasfield. Nonetheless, a deterioration has been seen for several months now. Indeed, at this rate, borrowing for 2012/2013 overall will massively overshoot the OBR's forecast of £120bn (excluding Royal Mail effects) by over £35bn. And with the recovery falling well short of the OBR's expectations, we think that the government will struggle to cut borrowing at all next year either.
Tom Vosa, National Australia BankTom Vosa, National Australia Bank
The monthly numbers are terrible, but the trend so far isn't disastrous – we still have a lower cumulative deficit than we has this time last year. Unless we see a further fall in revenue, the government could possibly still have a small undershoot for the fiscal year as a whole.The monthly numbers are terrible, but the trend so far isn't disastrous – we still have a lower cumulative deficit than we has this time last year. Unless we see a further fall in revenue, the government could possibly still have a small undershoot for the fiscal year as a whole.
Alan Clarke, Scotia BankAlan Clarke, Scotia Bank
July was not a good month for UK public finances. Even if the deterioration halts and borrowing is the same as that month a year ago for the rest of the year, then full year borrowing will be around £13bn higher than forecast. Excluding the impact of the Royal Mail Pension Fund, this has been the second worst four-month start to a fiscal year since the crisis began. This will raise pressure on the government to keep the fiscal plan on track - tighten more to make up for lost ground, or loosen a little and hope that the extra growth delivers better public finances. July was not a good month for UK public finances. Even if the deterioration halts and borrowing is the same as that month a year ago for the rest of the year, then full year borrowing will be around £13bn higher than forecast. Excluding the impact of the Royal Mail Pension Fund, this has been the second-worst four-month start to a fiscal year since the crisis began. This will raise pressure on the government to keep the fiscal plan on track – tighten more to make up for lost ground, or loosen a little and hope that the extra growth delivers better public finances.
Jason Conibear, forex specialists Cambridge MercantileJason Conibear, forex specialists Cambridge Mercantile
Plan A now has so many holes in it, it is fast resembling a piece of Swiss cheese. Despite the government's austerity measures, it still seems powerless to reduce the deficit. Net debt continues to march upwards, and now stands at nearly two thirds of GDP. The government is borrowing more to pay the bills too – all of which makes a mockery of the chancellor's centrepiece economic policy. While Plan A is a fine idea in theory, the chancellor's obsessive focus on deficit reduction isn't working; and to make matters worse, it is distracting him from the underperforming economy as a whole. When austerity is merely an article of blind faith and not an economic instrument, something is badly wrong. Plan A now has so many holes in it, it is fast resembling a piece of Swiss cheese. Despite the government's austerity measures, it still seems powerless to reduce the deficit. Net debt continues to march upwards, and now stands at nearly two thirds of GDP. The government is borrowing more to pay the bills too – all of which makes a mockery of the chancellor's centrepiece economic policy. While Plan A is a fine idea in theory, the chancellor's obsessive focus on deficit reduction isn't working; and to make matters worse, it is distracting him from the underperforming economy as a whole. When austerity is merely an article of blind faith and not an economic instrument, something is badly wrong.
David Kern, British Chambers of CommerceDavid Kern, British Chambers of Commerce
The small deficit in July was disappointing and larger than the market expected. The figure highlights the huge challenges facing the UK in restoring stability to its public finances. Deficit reduction is a difficult and arduous task, which will put pressures on both business and consumers over the coming years. Judging by these figures, we expect total borrowing in 2012/13 to exceed the total predicted by the OBR at the time of the March Budget by around £10bn.The small deficit in July was disappointing and larger than the market expected. The figure highlights the huge challenges facing the UK in restoring stability to its public finances. Deficit reduction is a difficult and arduous task, which will put pressures on both business and consumers over the coming years. Judging by these figures, we expect total borrowing in 2012/13 to exceed the total predicted by the OBR at the time of the March Budget by around £10bn.
While there are many calls for the government to abandon its austerity plan, this is not the answer. To maintain credibility, we need to persevere with spending cuts, but supplement them with forceful policies to boost growth. This may mean taking some difficult choices in the months ahead. The chancellor has persuaded the financial markets that he is determined to tackle the deficit, and now is the time for him to make use of his hard-won credibility to support growth. If the UK is to return to growth, we need to see more deregulation, increased infrastructure spending, and the creation of a state-backed business bank.While there are many calls for the government to abandon its austerity plan, this is not the answer. To maintain credibility, we need to persevere with spending cuts, but supplement them with forceful policies to boost growth. This may mean taking some difficult choices in the months ahead. The chancellor has persuaded the financial markets that he is determined to tackle the deficit, and now is the time for him to make use of his hard-won credibility to support growth. If the UK is to return to growth, we need to see more deregulation, increased infrastructure spending, and the creation of a state-backed business bank.