By Brian Swint
May 21 (Bloomberg) -- Britain had an 8.5 billion-pound ($13.4 billion) budget deficit in April, the most for the month since records began in 1993, and Standard & Poor’s Ratings Services signaled the country may lose its top credit rating.
The shortfall in the first month of the fiscal year compared with a 1.8 billion-pound deficit in April 2008, the Office for National Statistics said in London today. Tax revenue fell 9.5 percent and spending increased 5.4 percent.
The damage inflicted by the worst recession since World War II led Standard & Poor’s to revise the outlook for the U.K. to negative from stable, saying debt heading for 100 percent of gross domestic product is incompatible with a AAA rating. The pound fell the most in almost a month, stocks and bonds slid and the cost of insuring debt against default climbed.
“It’s looking more likely that we will get a ratings downgrade,” said Alan Clarke, an economist at BNP Paribas SA in London. “That will make it more expensive to service debt.”
Prime Minister Gordon Brown expects the budget deficit to double to 12.4 percent of economic output in the current fiscal year. The Treasury has been hit hard by losses at banks and the housing-market slump, the parts of the economy that helped Brown fund rapid investment in schools and hospitals during his decade as finance minister.
Debt Warning
“We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the next general government debt burden could approach 100 percent of gross domestic product and remain near that level in the medium term,” S&P analysts led by David Beers in London said in a report today.
The pound weakened to $1.5659 as of 10:22 a.m. in London, from $1.5755 yesterday, and to 88.46 pence per euro, from 87.47 pence.
The public finances typically receive a boost in April, when large companies pay quarterly installments of corporation tax, based on estimated profits for the current financial year.
Last month, cash receipts of corporation tax dropped 27 percent from a year earlier. Value-added tax, a levy on sales, fell 23 percent and income tax declined 14 percent. Net spending on social benefits rose 8.9 percent after unemployment rose at the fastest pace since 1981 in the first quarter of the year.
Cash Deficit
A measure of the cash entering and leaving the Treasury showed a deficit of 5.2 billion pounds, the first April shortfall since 1996 and the highest for the month since records began in 1984. The gap excluding capital investment was 7 billion pounds, the most for the month since at least 1998.
Concern over the U.K. fiscal position grew after the Treasury predicted the deficit will reach 175 billion pounds this fiscal year and said it plans to sell an unprecedented 220 billion pounds of debt to cover the shortfall and the cost of propping up banks.
Moody’s Investors Service, which assigns a Aaa rating to the U.K., last month said Britain is “taking risks” with the public finances and the Washington-based International Monetary Fund yesterday said the government needs to take tougher action to limit the buildup up debt once the economy emerges from recession.
Conservative leader David Cameron has warned of a period of “austerity” if his party wins the next election, due by June 2010 at the latest.
Tax Increases, Spending Cuts
Whichever party takes office will need to raise the equivalent of 3.2 percent of national income to balance the books, since planned tax increases and spending cuts worth 27 billion pounds a year by 2013-14 still leave the government borrowing to pay for non-investment spending, according to the Institute for Fiscal Studies.
Government debt is already at the highest level since the mid 1970s, and the Treasury says it may total 1.4 trillion pounds by 2013-14, of 79 percent of gross domestic product.
Net debt excluding the liabilities of Northern Rock Plc and Bradford & Bingley Plc, both seized by the government last year, rose to 42.9 percent of GDP in the first quarter, or 609 billion pounds.
Including the two banks, debt climbed to 53.2 percent of GDP in April, or 754 billion pounds, up from 618.7 billion pounds a year earlier. Debt may pass 2.2 trillion pounds when part-nationalized lenders Royal Bank of Scotland and Lloyds Banking Group Plc are taken onto the government books, the statistics office says.
To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.
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