U.K. Balances Day-to-Day Budget for First Time Since 2002

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(Bloomberg) -- Britain was in surplus on its day-to-day budget for the first full fiscal year since the early 2000s, a milestone that is almost certain to revive calls for an end to austerity.

Revenue exceeded spending by 112 million pounds ($156 million) in the 12 months through March, meaning Britain is now borrowing only to finance capital investment, figures from the Office for National Statistics showed Tuesday.

Including investment, the deficit narrowed to 42.6 billion pounds, the least in 11 years and below the 45.2 billion pounds predicted by budgetary officials last month. In March alone, the shortfall unexpectedly narrowed to 1.3 billion pounds, the lowest for the month since 2004.

Almost a decade of austerity has seen the deficit fall from 9.9 percent of GDP in the aftermath of the financial crisis to 2.1 percent last year, but the cuts have left voters weary and taken a heavy toll on Prime Minister Theresa May’s Conservative government.

The squeeze has led to the loss of hundreds of thousands of local-authority jobs and left hospital emergency services struggling to cope with a spike in winter illnesses. In a sign that the government is yielding to public pressure, it announced last month it was lifting the cap on pay increases for nurses and other workers in the National Health Service.

The elimination of the current-budget deficit came a year earlier than the Office for Budget Responsibility predicted but two years later than George Osborne envisaged when he became chancellor in 2010 -- before the European sovereign-debt crisis hit economies across the region.

Debt Burden Falling

The surplus last year was the first since 2001-02, when Tony Blair was prime minister and the economy was growing healthily. Net debt fell for a third year to 76.3 percent of GDP, the lowest since 2011-12. Chancellor of the Exchequer Philip Hammond hailed the figures as further evidence of an economy “at a turning point.”

Revenue proved much stronger than forecast, growing 3.3 percent. Self-assessed tax receipts, which were expected to be hit by distortions to dividend payments, fell just 0.6 percent amid record levels of employment that boosted income tax.

On the spending side, tight control over departmental budgets was partly offset by higher debt costs -- the result of faster inflation -- and bigger transfers to European Union institutions. The increase was due to the EU demanding greater frontloading of contributions for 2018 than they did in 2017.

Cautious Approach

The cash measure used to calculate how much the Treasury needs to borrow in the financial markets came in at 40.7 billion pounds in 2017-18, instead of the 40.3 billion pounds predicted by the OBR. The Debt Management Office announced after the data that it is increasing its gilt-issuance plans for the current fiscal year by 3.1 billion pounds.

In March, debt costs were 1 billion pounds lower than a year earlier at just 300 million pounds, as the recent slowdown in inflation cut the cost of servicing index-linked bonds.

Despite the improvement in the public finances, Hammond may be reluctant to loosen the purse string too much with Brexit uncertainty hanging over the economic outlook.

The OBR predicts Britain will still be borrowing 21 billion pounds by 2023, casting doubt over whether Hammond can balance the books by the middle of the next decade as promised.

©2018 Bloomberg L.P.

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