U.K. Budget Deficit Swells to Post-War High on Slump

By Mark Deen

Oct. 20 (Bloomberg) -- Britain posted its biggest six-month budget deficit since World War II as the slide into a recession hobbled tax receipts and government spending jumped.

The 37.6 billion-pound shortfall ($65 billion) in the fiscal first half through September was the largest since records started in 1946, when Clement Attlee was prime minister, the Office for National Statistics said in London today. Last month, the deficit widened to 8.1 billion pounds.

With the economy next year facing its first full-year contraction since 1991, Chancellor of the Exchequer Alistair Darling has pledged to keep spending on job-creating projects such as building work. Tax increases and spending restraint will eventually be needed to fill the hole in the public finances, economists say.

``The pain cannot be delayed forever,'' said Gemma Tetlow, a senior research economist at the Institute for Fiscal Studies in London. ``Once the current crisis abates, this government, or its successor, is likely to have to introduce a combination of new tax raising measures and further spending cuts as a share of national income to reduce borrowing and debt.''

The deficit in the six months through September exceeded the 35.8 billion-pound shortfall for the whole of the previous fiscal year, which ended March 31. Spending rose 6.1 percent, three times the pace of tax receipts. The shortfall was 21.5 billion pounds in the same six months last year.

Tax Losses

The budget gap was last as wide in the aftermath of World War II, when the country, its resources depleted by the six-year military effort, was forced to borrow $4.34 billion from the U.S. to stave off bankruptcy.

The Treasury is losing tax revenue as the housing slump deepens and the credit crisis hammers the earnings of financial firms, which contribute a quarter of all taxes from company profits. Corporation tax receipts fell 8 percent in September from a year earlier. At the same time, the government faces higher spending on welfare payments as unemployment climbs.

The International Monetary Fund predicts the U.K. economy will contract 0.1 percent next year after forecasting growth of 1.6 percent six months ago.

``At a time when every country has been affected by the global financial crisis that we are seeing Britain cannot be immune from what is happening and that is going to have an impact on the British public finances,'' Michael Ellam, a spokesman for Prime Minister Gordon Brown, told reporters in London today.

`Destabilizing Factor'

The deficit may reach 64 billion pounds for the year as whole as the economic slump saps tax receipts, 21 billion pounds more than Darling forecast seven months ago, according to the IFS.

That's equal to 4.4 percent of gross domestic product. Some economists say the shortfall may total as much as 7 percent by 2010, the highest since the aftermath of the last recession. Brown has to hold a general election by the middle of that year at the latest.

``The speed with which the political debate is turning to fiscal loosening raises the risks that the overall fiscal loosening in the recession and pre-election period will be so big that the deficit itself will become a destabilizing factor for the economy,'' said Michael Saunders, chief Western European economist at Citigroup Inc. in London say.

Political Revival

The government has already given away almost 4 billion pounds in emergency tax cuts since March to ease the impact of higher food and fuel prices and the credit crunch.

Brown is now seeking to build on a revival in opinion polls that began last month as voters approved of his handling of the meltdown in the banking industry.

In recent weeks, the government has seized Bradford & Bingley Plc, pledged up to 50 billion pounds to buy stakes in cash-strapped banks and promised to compensate Britons who lost money in collapsed Icelandic banks.

Those commitments may lift debt to more than 50 percent of gross domestic product, the highest since Britain sought an IMF bailout in 1977, according to the IFS.

Darling will use his pre-budget report before the end of the year to admit that his March forecasts for the economy were far too optimistic, and abandon a decade-old pledge to keep government debt below 40 percent of GDP, economists say.

In September, net debt stood at 43.4 percent of GDP, or 645.3 billion pounds, compared with 36.2 percent a year earlier. Much of the increase was due to the inclusion of 81.9 billion pounds of liabilities at Northern Rock Plc, the mortgage lender that was nationalized in February.

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net