U.K. Budget Deficit Narrows as Osborne Faces Economic Test

Bloomberg: Britain’s budget deficit narrowed more than economists forecast in March as capital investmentfell, providing a boost for Chancellor of the Exchequer George Osborne as he faces new questions over his economic management.

The shortfall excluding temporary support for banks was 15.1 billion pounds ($23 billion) compared with 16.7 billion pounds a year earlier, the Office for National Statistics said in Londontoday. The median forecast in a Bloomberg News survey of 23 economists was for a deficit of 15.5 billion pounds.

Figures this week are forecast to show Britain only narrowly avoided a third recession in five years. The data may add to pressure on Osborne less than a week after Fitch Ratingsstripped the U.K. of its top credit grade and the International Monetary Fund urged him to ease the pace of deficit reduction.

“Austerity is already here for a long while but it could be much worse than this,” Richard Barwell, an economist at Royal Bank of Scotland Group Plc (RBS) in London, said before today’s figures. Government forecasts “look massively optimistic. It’s hard to get positive about the economy at the moment though I think we’ll probably avoid a triple-dip.”

Tax income fell 5.7 percent in March from a year earlier, led by a 12 percent decline in income-tax receipts. Spending dropped 4.7 percent. Net investment declined to 4.6 billion pounds from 7 billion pounds.

The pound remained weaker against the dollar after the data were released. It was trading at $1.5211 as of 9:42 a.m. in London, down 0.5 percent from yesterday. Gilts rose, pushing the 10-year yield down 3 basis points to 1.62 percent.

Full-Year Deficit

In the fiscal year that ended March, the deficit narrowed to 120.6 billion pounds from 120.9 billion pounds a year earlier, with revenue and spending both rising 1.8 percent. The shortfall, equal to 7.8 percent of gross domestic product, is in line the Office for Budget Responsibility’s forecast last month.

The figures exclude the 28-billion-pound transfer of Royal Mail Group Ltd. pension assets and 6.4 billion pounds of gilt- coupon income from the Bank of England’s bond-buying program.

EU accounting rules restrict the amount of coupon income the Treasury can count against net borrowing, though cash measures of the public finances receive the full benefit. In March, the central bank paid a third 3.8 billion-pound installment. The public-sector cash requirement was 31.3 billion pounds, the highest for any March since records began in 1984. The central government cash requirement narrowed to 109.5 billion pounds in the 2012-13 fiscal year from 126.5 billion pounds a year earlier.

Economic Outlook

The lack of economic growth has undermined efforts to cut a deficit that stood at a record 11 percent of GDP when Prime Minister David Cameron took office almost three years ago by sapping tax revenue and pushing up spending on welfare.

OBR forecasts last month show the government borrowing 160 billion pounds more by April 2015 than had been forecast in June 2010, forcing the government to miss its target of balancing the structural budget deficit within five years.

Fitch on April 19 became the second ratings company to strip Britain of its top grade, citing a gross debt burden it estimates will peak at 101 percent of GDP in 2015-16 compared with 74 percent in 2010. Two days earlier, the IMF cut its 2013 growth outlook to 0.7 percent and urged Osborne to consider easing his austerity program.

The U.K. economy probably grew 0.1 percent in the first quarter, meaning it avoided an unprecedented triple-dip recession after contracting 0.3 percent in three previous months, Bloomberg forecasts show.

Net Debt

Britain has recovered little more than half of the output lost during the financial crisis, lagging behind every other Group of Seven nation bar Italy. The government blames the debt crisis in the euro region, the biggest market for British exports. The opposition Labour Party says Osborne has made the situation worse by trying to cut the deficit too quickly.

Today’s figures showed net debt climbed to 75.4 percent of GDP in March, or 1.19 trillion pounds. It is forecast by the OBR to peak at 85.6 percent of GDP in 2016-17, three years later and 345 billion pounds higher than first envisaged.

European Union figures yesterday showed gross government debt rose to 90 percent of GDP in 2012, compared with an EU average of 85.3 percent and up from 85.5 percent in 2011.

reporter on this story: Andrew Atkinson in London