U.K. Budget Deficit Widens Before Election Spending Bonanza

(Bloomberg) --

U.K. government borrowing is on the rise even before the winner of next month’s election opens up the spending taps.

The budget deficit in the first seven months of the fiscal year totalled 46.3 billion pounds ($60 billion), 10% higher than a year earlier. The shortfall in October alone widened to a larger-than-forecast 11.2 billion pounds, the most for the month since 2014.

The increase reflects tax and spending giveaways announced last year, primarily extra resources for the National Health Service, as the government ends the budget cuts that have reduced the deficit from over 10% of GDP in the aftermath of the financial crisis.

Britain will step up spending next year whoever wins the Dec. 12 election, as Prime Minister Boris Johnson and opposition leader Jeremy Corbyn vie for votes with promises of tens of billions of additional pounds for austerity-ravaged public services and infrastructure.

A simple extrapolation from the year to date suggests the deficit in 2019-20 will come in around 45.6 billion pounds, overshooting Office for Budget Responsibility forecasts.

More Borrowing

Britain has greater freedom to borrow than in recent years, when the target was to get the deficit below 2% of GDP next year and balance the books by the mid-2020s.

Johnson’s Conservatives are now prepared to run a deficit of 3% of GDP to fund spending on infrastructure, meaning an extra 22 billion pounds of borrowing a year. Corbyn’s Labour Party is promising to boost investment by 55 billion pounds a year in its first term, more than doubling current levels of capital spending.

Johnson also promised big tax cuts during the Tory leadership campaign, though his scope appears to be constrained by new fiscal rules requiring revenue and non-investment spending to be in balance within three years.

Spending rose 3.4% between April and October, outstripping revenue growth of 2.4%, the figures from the Office for National Statistics Thursday show. However, economists say spending may have been front-loaded and the pace of growth could slow in the second half.

In October, spending rose 2.6% from a year earlier, possibly the result of government departments preparing for a no-deal Brexit ahead of the now-postponed Oct. 31 deadline. Staff costs jumped almost 10% to the highest on record and purchases of goods and services rose 8.1%. Debt-interest costs fell 6.5%.

Receipts barely rose, with taxes on production stagnating for the first time in 11 years amid falling revenue from tobacco and stamp duty, while VAT receipts increased. There were also declines in revenue from income tax, possibly reflecting a weaker labor market, and corporation tax.

To contact the reporters on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net;David Goodman in London at dgoodman28@bloomberg.net

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

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