U.K. Budget Deficit Is Increasing Amid Easing of Austerity

(Bloomberg) -- U.K. government borrowing is rising more strongly than expected as a decade of austerity begins to thaw.

The budget deficit in the first five months of the fiscal year was 28% higher than in the same period of 2018, despite a modest improvement in August, Office for National Statistics figures published Tuesday show.

The increase reflects tax and spending giveaways announced last year, as the government eases the squeeze that has reduced the deficit from over 10% of GDP in the aftermath of the financial crisis to 1.9% last year.

Billions of extra pounds are being poured into the National Health Service and public-sector pay, and Chancellor Sajid Javid has vowed to boost spending further next year as Britain heads for a possible general election to break the Brexit impasse.

The latest data contain sweeping revisions, largely due to a change to the way the ONS treats student loans. The deficit in 2018-19 is now 41.4 billion pounds ($52 billion), 17.8 billion pounds higher than previously stated.

Student debt accounted for 12.4 billion pounds of the increase, with loans expected to be written off now classified as spending and those sold at a discount to their recorded value adding to the deficit. This effect will continue, making it hard for Javid to deliver on his pledge to “turn the page on austerity’’ without breaking the fiscal rules set by his predecessor Philip Hammond.

Those rules require that structural borrowing is kept below 2% of GDP in 2020-21 but Javid used up his available headroom, and possibly exceeded it, when he promised the biggest spending boost for 15 years.

Overshoot Seen

The budget deficit so far this fiscal year totalled 31.2 billion pounds, 7 billion pounds higher than a year earlier. August alone saw the shortfall narrow slightly to 6.4 billion pounds amid lower debt-interest costs.

Spending including capital investment rose 4.1% between April and August, with current departmental spending up more than 5%. Revenue gained just 2.1%, possibly reflecting a loss of economic momentum ahead of Brexit.

The Office for Budget Responsibility conceded that the deficit is on course to exceed its forecast this year, even when restated for the new treatment of student loans. Methodological changes alone are likely to add at least 15 billion pounds a year, around 4 billion pounds more than predicted in March, the watchdog said.

Minor upward effects on the deficit last year came from changes relating to publicly funded pension schemes and corporation tax, which added 1.3 billion pounds and 2.6 billion pounds, respectively. Net debt was revised lower by almost 30 billion pounds, almost all of it due to the pension changes.

There are no implications for government-bond issuance, however, because actual cash flows remain unchanged.

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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