U.K. Budget Deficit Widens as Slowing Economy Saps Tax Receipts

By Mark Deen

July 18 (Bloomberg) -- The U.K. budget deficit widened to 9.2 billion pounds ($18.4 billion) in June, more than economists expected, as the economic slowdown sapped tax receipts.

The shortfall, the most for the month since records began in 1993, was up from 6.3 billion pounds a year earlier, the Office for National Statistics said today in London. Economists predicted a deficit of 7.4 billion pounds, the median of 17 forecasts in a Bloomberg survey showed.

Chancellor of the Exchequer Alistair Darling may find it hard to meet his March forecast of a 43 billion-pound deficit this year as the economic slowdown cuts tax receipts. In emergency moves since then, Darling has given away 3.25 billion pounds to spur growth and revive support for his ruling Labour Party. Darling may change Britain's decade-old rules for government spending later this year, the Treasury said yesterday.

``What we've witnessed so far this year is a deterioration of the public finances, and it's likely to get worse going forward,'' said Philip Shaw, chief economist at Investec Securities in London.

In the first three months of the fiscal year, the budget deficit was 24.4 billion pounds, the highest quarterly deficit since records began 1946. A year earlier, the deficit was 14.7 billion pounds. Taxes rose 2.5 percent and spending grew 6.9 percent.

A cash-based measure showed the deficit was 15.5 billion pounds in June, the highest for the month since records started in 1984, compared with 10 billion pounds a year earlier. Economists forecast a shortfall of 12.6 billion pounds.

Fiscal Rules

Economists say Prime Minister Gordon Brown is at risk of breaching the fiscal rules he created as finance minister in 1997, when he promised to borrow only for investment over the economic cycle and keep debt below 40 percent of economic output.

Treasury officials will decide whether to change the rules when the ONS publishes annual revisions to economic growth in September, which may show when the current economic cycle ends.

Forecasting growth of more than 2 percent this year and next, Darling is more optimistic than economists. Bank of England Governor Mervyn King says Britain may slip into a recession as the worst housing slump since the early 1990s deepens.

The slowdown threatens to cut revenue from consumer spending, housing transactions and company profits. An increase in receipts from North Sea companies, which are profiting from oil prices that reached a record above $147 a barrel last week, may not be enough to make up the loss, according to the London- based Institute for Fiscal Studies.

Slowing Tax Receipts

In June alone, taxes increased just 2.5 percent, with receipts of value-added tax falling 4.6 percent. Corporation tax rose just 0.3 percent and income tax gained 1.7 percent. Spending rose 6.9 percent.

Opposition parties say Prime Minister Gordon Brown has left little room to help the economy with tax cuts after almost a decade of rapid public spending growth left Britain with one of the highest budget deficit in Europe. The Organization for Economic Cooperation and Development predicts a shortfall of 3.5 percent of gross domestic product in the fiscal year from next April.

``Things aren't looking good in the short term,'' George Osborne, Treasury spokesman for the Conservative Party, said in a Bloomberg Television interview yesterday. ``We are going to face some very difficult choices around the budget deficit. We've got to make sure the government lives within its means.''

In May, Darling announced a 2.7 billion-pound emergency tax for 22 million people, and this week he postponed for six months an increase in fuel duty to cushion motorists from the surge in oil prices. The delay will cost the Treasury 550 million pounds this year.

Poll Ratings

The prospect of a recession is eroding support for Brown, who has until June 2010 to hold the next general election. The Conservatives, led by David Cameron, had a 22 percent point lead over Labour in a YouGov Plc survey published on July 13.

Net debt stood at 38.3 percent of GDP in June, the highest since July 1999, the statistics office said. Including the liabilities of Northern Rock Plc, the mortgage lender taken into temporary state ownership in February after its funding dried up, debt was 44.2 percent of GDP.

The current budget, which excludes investment, showed a deficit of 7.6 billion pounds in June and 20.4 billion pounds for the first three months of the fiscal year, up from 12.5 billion pounds a year earlier and the highest quarterly shortfall since 1946.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net