U.K. October Budget Deficit Narrows as Cuts Bite

By Gonzalo Vina - Nov 22, 2011 4:54 PM GMT+0700

Britain’s budget deficit narrowed in October as Chancellor of the Exchequer George Osborne slashed spending at government departments.

Net borrowing excluding support for banks fell to 6.5 billion pounds ($10.2 billion) from 7.7 billion pounds a year earlier, the Office for National Statistics said in London today. The shortfall was in line with the median of 13 forecasts in a Bloomberg News survey. Outlays at government departments dropped 3.1 percent, limiting overall spending growth to 1.1 percent. Revenue rose 4.1 percent.

Osborne and Prime Minister David Cameron have made all but eliminating a budget deficit of 9 percent of economic output by 2015 the centerpiece of their economic strategy, rebuffing opposition criticism that the cuts are hobbling growth. Only Greece, Ireland, Portugal and Iceland face a tighter fiscal squeeze among advanced economies, according to the International Monetary Fund.

“It’s a tad better than expected,” saidRoss Walker, chief U.K. economist at Royal Bank of Scotland Group Plc. “The markets are asking ‘is there a medium-term strategy and is it working?’ The answer to both is yes.”

The pound was trading at $1.5632 as of 9:53 a.m. in London, down 0.1 percent on the day. The yield on the benchmark 10-year government bond was little changed at 2.19 percent.

Harder Than Envisaged

Cameron yesterday said bringing Britain’s debt under control is proving “harder than anyone envisaged” as Europe’s debt crisis hits economic growth, paving the way for the Office for Budget Responsibility to downgrade its forecasts next week.

Independent forecasts published by the Treasury last week showed the economy expanding by 1 percent this year, compared with the 1.7 percent the OBR predicted at the time of the March budget. The fiscal deficit in the fiscal year through March is forecast to be 6 billion pounds higher than predicted at 128 billion pounds. The budget office, which oversees economic forecasting for the Treasury, will publish is revised forecasts on Nov. 29.

October is a key month for the public finances as quarterly payments of tax on corporate profits pour in. Corporation tax receipts last month fell 6.4 percent from a year earlier and taxes from income and capital gains declined 3.3 percent, a sign weaker growth is undermining the revenue needed to cut the deficit.

In the first seven months of the fiscal year, the deficit was 68.3 billion pounds compared with 78.7 billion pounds a year earlier. Revenue in the period rose 5.1 percent from a year earlier, behind the 7.2 percent predicted for the full fiscal year by the OBR. Spending climbed 2.4 percent, less than the OBR’s 3.6 percent forecast for the year.

‘Progress’

The Treasury said the figures show Osborne is making “progress” with his plan to eliminate the structural deficit over the next four years.

“The difficult decisions which have delivered this reduction in borrowing have made the U.K. a relative safe haven in the sovereign-debt storm, but we are not immune to the turbulence in the euro zone and its impact on British businesses,” the Treasury said in an e-mailed statement.

The deficit in October including government support for banks was 3.4 billion pounds. There was a public-sector net cash surplus of 643 million pounds, below the cash surplus of 1 billion pounds that was predicted by analysts. Net debt climbed to a record 966.6 billion pounds, or 62.3 percent of GDP.

Excluding financial interventions, the deficit in September was revised down by 1.2 billion pounds as a result of revisions to departmental estimates, the statistics office said.

To contact the reporter on this story: {Gonzalo Vina} in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net