U.K. Budget Surplus Shrank as Slowdown Curbed Tax

By Jennifer Ryan

Aug. 20 (Bloomberg) -- Britain's government budget surplus shrank in July as the economic slump sapped tax receipts, putting Prime Minister Gordon Brown at risk of breaking decade-old borrowing rules.

The 4.8 billion-pound ($8.9 billion) surplus was the smallest for the month since 2005, the Office for National Statistics said today. The median forecast in a survey of 15 economists was for a surplus of 4.3 billion pounds. In the first four months of the fiscal year, the deficit was 19.1 billion pounds, 10.7 billion more than a year earlier.

Brown may find it hard to keep borrowing within the limits he set as finance minister in 1997 as the economy teeters on the brink of a recession. The slump has damaged his reputation for competent management of the economy and reduced public support for the ruling Labour Party to the lowest since it took office.

``The slower pace of economic growth this year compared to last year is limiting receipts,'' said David Page, an economist at Investec Securities in London. ``Public finances are clearly very stressed.''

The Treasury usually has a surplus in July and three other months of the year when quarterly corporation tax payments are made. For the remaining months of the year, the government has usually reports a deficit.

Deficit Measure

A cash-based measure showed the budget surplus was 12.6 billion pounds in July, compared with 13.3 billion pounds a year earlier. Economists forecast a surplus of 10 billion pounds.

``We are on course to leave the next generation a higher national debt and the highest budget deficit of any major economy in the world,'' George Osborne, a Conservative lawmaker who speaks on finance, will say in a speech today, according to his office. ``All the leaks and briefings coming out of Downing Street at the moment suggest that the prime minister is preparing to try to buy his way out of trouble by bribing people with their own borrowed money.''

Government spending increased 6.9 percent. Tax receipts rose 2.7 percent in July from a year earlier as higher oil prices prompted North Sea producers to pay more tax.

About 4 billion pounds of the 9.9 billion pounds in corporation tax payments was from North Sea companies, more than twice as much as in the same month a year ago, the Office for National Statistics said. Tax from all companies fell from a year ago partly because July 2007 receipts were boosted by revenue from newly-created Real Estate Investment Trusts. Overall, corporation tax receipts rose 1.5 percent.

Darling's Forecast

The government is almost certain to borrow more in the current fiscal year than the 43 billion pounds Chancellor of the Exchequer Alistair Darling forecast in March, according to a survey of economists conducted by the Treasury in July.

In March, Darling forecast economic growth of as much as 2.25 percent this year and 2.75 percent in 2009. In its bleakest assessment of the economy in a decade, the Bank of England last week predicted virtually no growth over the next year and said at least one quarter of contraction is possible.

At stake is a government commitment to borrow only for investment over the economic cycle and keep debt below 40 percent of gross domestic product. In July, the government's total debt burden of 543 billion pounds amounted to 37.3 percent of GDP, up from 36.1 percent a year earlier.

Soaring fuel and food prices and the worst housing slump since the early 1990s are deepening the unpopularity of Brown, whose party has lost two parliamentary seats since May and lags behind the opposition Conservatives by about 20 points in opinion polls.

Brown has until June 2010 to hold the next election, and hopes of an economic rebound before then are dimming, prompting some of his own lawmakers to suggest he step down.

The U.K. budget deficit will reach 3.3 percent of GDP this year and next, the European Commission, the European Union's executive agency, forecast in April. In the 27-nation EU, only Hungary faces a bigger shortfall this year at 4 percent of GDP. The deficit in the U.S. is forecast at 5 percent of GDP and 1.9 percent in Japan.

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