U.K. Has Record July Deficit as Recession Curbs Taxes

By Reed V. Landberg

Aug. 20 (Bloomberg) -- Britain had an 8 billion-pound ($13.2 billion) budget deficit in July, the largest for the month since records began in 1993, as the recession ravaged tax revenue and the cost of unemployment benefits surged.

The shortfall compared with a surplus of 5.2 billion pounds a year earlier, the Office for National Statistics said in London today. It came in a month when the Treasury usually gets a boost from quarterly tax payments. Britain last had a deficit in July in 1996.

The U.K. will have the biggest deficit in the Group of 20 next year, when Prime Minister Gordon Brown faces re-election, according to the International Monetary Fund. Brown is urging G- 20 leaders to keep up a coordinated fiscal stimulus until a world economic recovery is more certain. The Conservative opposition says spending cuts and possible tax increases are needed to curb debt.

“They’re completely disastrous numbers,” Paul Mortimer- Lee, an economist at BNP Paribas SA, said on Bloomberg Television in London. “With the economy in a parlous state, not much tax is being collected. The chancellor’s estimate for the deficit is going to be overshot by a considerable margin.”

The Treasury forecasts a deficit of 175 billion pounds in the fiscal year that began in April. In the first four months, the shortfall was 50 billion pounds, more than triple the level a year earlier.

Market Reaction

British government bonds and the pound fell after the report. The benchmark 10-year gilt’s yield rose 3 basis points to 3.614 percent as of 12:03 p.m. in London. The pound, which traded as high as $1.6608 earlier in the day, slumped to $1.6464.

Two other reports today indicated that the economy may be starting to rebound from the worst recession in at least a generation. Retail sales rose for a second month, the statistics office said. Mortgage approvals by the six biggest U.K. banks climbed to the highest this year, the Bank of England said.

The U.K. deficit this year will touch 11.6 percent of gross domestic product, second only to the U.S. gap of 13.5 percent, the IMF estimates. Next year, the deficit may total 13.3 percent of GDP, almost double the 7.7 percent peak in the 1993-94 fiscal year under Conservative Prime Minister John Major.

Last month’s deficit far exceeded the 600 million-pound shortfall that was the median of 16 forecasts in a Bloomberg survey. The figures are “broadly in line with where we expect them to be,” Chancellor of the Exchequer Alistair Darling said at a press conference in Edinburgh today.

Falling Revenue

Government receipts dropped 15 percent in July from a year earlier, the steepest decline since records began in 1998. Cash receipts from corporate profits fell 38 percent and value-added tax declined 34 percent. Income tax payments dropped 15 percent, reflecting slower wage growth and job cuts at banks including Citigroup Inc. and Royal Bank of Scotland Group Plc.

Spending rose 7.5 percent, with net spending on social benefits jumping 10 percent after unemployment climbed to a 14- year high. Net investment rose 10 percent to 2.9 billion pounds as the government brought forward projects to help the economy.

“It’s essential that at a time like this, it’s necessary for the government to maintain spending,” Darling said. “We need to take steps to reduce our borrowing and we remain committed to doing that. It’s right to remain cautious. There are a lot of uncertainties out there.”

Credit-Rating Warning

The Treasury in April forecast a deficit of 12.4 percent of gross domestic product. To cover the gap, the government said it expects to sell an unprecedented 220 billion pounds of debt, prompting Standard & Poor’s to warn that Britain may lose its AAA credit rating.

Including the liabilities of banks now controlled by the government, such as Bradford & Bingley Plc and Northern Rock Plc, Britain had 800.8 billion pounds of debt in July, or 56.8 percent of GDP. That’s the biggest debt burden since at least 1974-75. In 1976, the U.K. sought an emergency loan from the International Monetary Fund.

A cash method of accounting, known as the public sector net cash requirement, showed a deficit of 200 million pounds, the first borrowing for a July on that measure since 1995. Economists had expected a 5.6 billion-pound surplus.

With Labour trailing the Conservatives in polls 10 months before the general election deadline, Brown has sought to draw dividing lines between continued investment under his government and Conservative cuts. Economists say spending restraint and higher taxes are inevitable, whichever party wins, limiting the pace of economic recovery.

To contact the reporter on this story: Reed Landberg in London at landberg@bloomberg.net.