Increased borrowing threatens debt goal
A day after the central bank governor tells Channel 4 News it is acceptable for Britain to miss its debt target, new figures show government borrowing rising to a record high for August.
Public sector net borrowing figures released today are the highest for any August since record-taking began in 1993. Borrowing – excluding financial sector interventions – rose to £14.410bn from £14.365bn in August 2011 as Britain’s recession drove up benefit payments 4.9 per cent and pushed down company tax receipts 2.1 per cent on the year.
Britain’s deficit widened 22 per cent to £59bn so far this year once the transfer of Royal Mail pension assets was stripped out.
“Today’s figures persist in painting a gloomy picture with weaker-than-expected growth in receipts from taxes on income, spending and profits,” said Rowena Crawford, senior research economist at the Institute for Fiscal Studies.
Chancellor George Osborne’s austerity drive has made him one of Britain’s most controversial politicians, with the country continuing to struggle despite the central bank’s £375bn stimulus bond purchases. The UK planned to eliminate the structural budget deficit by 2015 but a weak economy forced it to extend austerity by another two years. Prime Minister David Cameron warned it could last until 2020.
Osborne’s dilemma
Mr Osborne could soon face a tough choice between spending cuts or abandoning his goal to get the debt-to-GDP ratio falling by 2015. The UK has one of the biggest budget deficits of all major economies with a public sector net debt-to-GDP ratio of 66 per cent in August from 36 per cent before the financial crisis.
While Mr Osborne has made reducing the deficit a central plank of his policies, Labour opposition MPs want to ease off on plans for tax hikes and spending cuts aimed at erasing the structural budget deficit within five years and reducing the debt-to-GDP ratio.
Bank of England Governor Sir Mervyn King, a supporter of the government’s efforts, told Channel 4 News on Thursday that missing the 2015 debt goal would be acceptable if the reason was weakness in the economy.
Deficit target
Sir Mervyn told Jon Snow: “If the economy is growing slowly then, yes, indeed and that was always part of the plan. But if the world economy were to pick up and we could grow quickly then it would not be acceptable to miss it – if we had no real excuse for it.”
The International Monetary Fund (IMF) has already predicted Britain’s debt-to-GDP ratio would not fall by 2015.
Britain has so far kept its top credit rating as the 65 per cent net debt-to-GDP ratio is lower than in countries like the US. Britain’s borrowing costs are still near record-lows, indicating the market’s trust in the government’s commitment to fiscal stability.
Some economists expect borrowing to overshoot forecasts by up to £30bn.
Another downgrade?
The Office for Budget Responsibility (OBR) watchdog said government expenditure ran close to forecasts but tax receipts were lower.
“There continues to be significant uncertainty around the prospects for full-year borrowing,” the OBR said.
Mr Osborne is to make his annual autumn statement on 5 December and may face another downgrade in the OBR’s economic growth forecast, as well as a gloomy outlook for the budget deficit.
“If the chancellor follows the (BoE) governor’s lead – and we expect he will – then he will stick with the current fiscal plans … but will not introduce extra fiscal tightening to correct the adverse effects on revenues of economic weakness,” Citi economist Michael Saunders said.
