U.K. Budget Deficit Soars as Britain Prepares for Brexit

(Bloomberg) --

U.K. government borrowing surged in the first four months of the fiscal year, a reminder of the vulnerability of the public finances as Britain braces for a no-deal Brexit.

The budget deficit between April and July stood at 16 billion pounds ($19.4 billion), 60% more than the same period last year, Office for National Statistics figures published Wednesday show.

Borrowing is rising much more quickly than budget officials forecast in March as revenue from taxes fails to keep pace with spending, a possible sign that the economic downturn in the second quarter is taking a toll.

That’s an unwelcome fiscal inheritance for Prime Minister Boris Johnson, who has promised 20 billion pounds of tax cuts plus extra money for policing, health care and schools. The public finances could take a further 30 billion-pound hit if he sees through his threat to let Britain crash out of the European Union without a deal on Oct. 31, forecasters estimate.

Years of post-crisis austerity have brought down the deficit from almost 10% of GDP in 2009-10, the highest in peacetime history, to a 17-year low of just 1.1% last year.

July is typically a good month for the public finances, as the Treasury benefits from larger-than-normal tax payments.

Overshoot Seen

But revenue exceeded spending by just 1.3 billion pounds last month, compared with a surplus of 3.6 billion pounds a year earlier. Tax revenue fell 0.5%, though there was a modest 2.4% increase when gilt-interest revenues transferred from the Bank of England are excluded. Spending jumped 6.5%, boosted by departmental outlays and capital investment.

Without a significant improvement, borrowing for the year as a whole appears likely to exceed the 29.3 billion pounds forecast by the Office for Budget Responsibility in March. The deficit fell to 23.6 billion pounds in the 2018-19 fiscal year.

July sees many firms pay their first tax installment, based on their estimated profits for the year. Corporation-tax revenue fell 1.1% from a year earlier.

Separately, for self-employed workers a second payment on account for tax liabilities in the 2018-19 fiscal year was due on July 31. Income tax rose 1.5%, with self-assessed revenues climbing 3.5%.

Chancellor Sajid Javid has pledged to keep to existing fiscal rules requiring that the structural budget deficit is kept below 2% of GDP in 2020-21 and the burden of government debt declines. However, there are doubts over the longer-term outlook for the public finances.

Net debt excluding the Bank of England has doubled since the financial crisis and stood at 74.1% of GDP in July.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

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

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