U.K. Budget Surplus Smallest Since 1995 as Taxes Fall

By Mark Deen

Feb. 19 (Bloomberg) -- Britain had a 3.3 billion-pound ($4.7 billion) budget surplus in January, the smallest for the month for 14 years, as the financial crisis ravaged bank profits and the recession worsened.

The surplus, normal for a month when the government collects more than a tenth of its annual tax revenue, compares with 13.9 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 15 forecasts in a Bloomberg News survey was 7 billion pounds.

The figures highlight the damage inflicted by the credit crisis as Prime Minister Gordon Brown confronts the biggest budget deficit since modern records began in 1970. Revenue is falling as a housing bust deepens and losses mount at financial firms. Brown has pledged billions in tax cuts and spending to counter the slump.

“The January numbers were very disappointing,” said David Page, an economist at Investec Securities in London. “The sharp fall in tax revenue reflects the downturn in the economy, but this scale of fall was much worse than expected.”

Revenue typically pours in during January, much of it from financial services firms as banks pay tax on their profits and their employees receive annual bonuses. This year, bonuses are forecast to have fallen by as much as 60 percent, according to the Centre for Economics and Business Research.

Tax Receipts

Tax income fell 11 percent, with cash receipts of corporation tax falling 24 percent, income tax dropping 4.3 percent and value-added tax plunging 11 percent, reflecting a 2.5 point cut in the sales levy since Dec. 1. National insurance contributions, a payroll tax, slipped 2.9 percent. Spending rose 6.7 percent as the highest unemployment in a decade led to a 15 percent jump in net spending on social benefits.

In the first 10 months of the fiscal year, the deficit soared to 67.2 billion pounds from 23.1 billion pounds a year earlier. The Treasury says the gap will peak at 118 billion pounds, or 8 percent of gross domestic product, in the year through March 2010. The European Commission yesterday warned that may be an underestimate.

A measure of the cash entering and leaving the Treasury showed a budget surplus of 25.1 billion pounds. Economists forecast 7.7 billion pounds. The surplus reflects a transfer of funds from one part of the public sector to another relating to the 20 billion-pound recapitalization of Royal Bank of Scotland Group Plc.

Credit Crunch

The housing and banking booms underpinned almost 16 years of expansion until the economy stalled in the second quarter, helping Brown to fund pledges to boost investment in services and cut poverty during his decade as finance minister. Until the credit crunch took hold, financial services firms contributed about 14 percent of all U.K. tax revenue.

As the economy heads for its deepest recession in at least three decades, polls put the governing Labour Party as much as 20 points behind the opposition Conservatives with 16 months to go before Brown has to hold the next general election.

Net debt rose to 40.4 percent of GDP in January, the highest in 11 years. Including financial-sector interventions, it fell to 47.8 percent from 49.5 percent in December.

The statistics office said today that Lloyds Banking Group Plc, 43 percent government-owned after a 17 billion-pound cash injection, became a public company on October 13.

When Royal Bank of Scotland and Lloyds are fully incorporated into the public accounts, the liabilities of the two banks less short-term liquid assets will add up to 1.5 trillion pounds to net debt, equal to 100 percent of U.K. national income, according to the ONS, which said this is a preliminary estimate.

Concern about the ability of Britain to shoulder these liabilities has undermined confidence in sterling, with the pound falling 9 percent against the euro this year.

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