UK suffers budget deficit in January

BRITAIN POSTED its first budget deficit on record for the month of January this year, a worse-than-expected result for a Labour government struggling to pacify debt-wary markets ahead of an election it is tipped to lose.

Yesterday’s surprisingly bad figures weighed on the pound and British government bond prices fell, as concerns grow about the credibility of Labour’s plans to curtail a record budget deficit forecast to top 12 per cent of gross domestic product this year.

Worries about Britain’s deficit have raced up the political agenda over the past six months with an election expected on May 6th and with other debt-laden European countries such as Greece and Spain facing the wrath of impatient financial markets.

There was also bad news for those in the Labour Party hoping for a strong recovery to improve its re-election chances. Lending to businesses shrank at its fastest pace on record in December, according to the Bank of England.

BoE policymaker Kate Barker said the economy may go through another quarter of contraction after emerging from its worst recession since the second World War at the end of last year.

“I think the recovery will be quite hesitant,” she said.

But a glimmer of hope came from industry figures showing factory orders falling at their slowest pace in more than a year this month and growing optimism in the sector.

The UK Office for National Statistics said British public-sector net borrowing (PSNB), the government’s preferred measure, came in at £4.339 billion (€4.978 billion) last month compared with a £5 billion repayment a year ago.

This marked the first PSNB borrowing for the month of January since records began in 1993.

January is usually a surplus month for the public purse due to deadlines for self-assessed income tax and corporation tax. Analysts had forecast a surplus of £2.8 billion. “These figures emphasise the scale of the fiscal challenge facing the next government,” said Andrew Goodwin, an economic adviser at Ernst Young.

The opposition Conservatives, favourites to win the upcoming election, warn Britain may lose its top credit rating and the pound could suffer unless more stringent action is taken to curb the deficit that Labour has pencilled in.

Labour says going beyond its plans to halve the deficit over four years would derail Britain’s fragile recovery after an 18-month recession. Markets have made it clear they want more detail on both approaches to judge how credible they are.

“For now, the markets and credit ratings agencies seem prepared not to put the UK in the same category as the fiscally challenged euro-zone economies like Greece,” said Jonathan Loynes, an economist at Capital Economics.

“But with the budget deficit heading towards 13 per cent of GDP this year, and perhaps exceeding that of Greece, it is clear that a more credible plan to restore the public finances to health will be required.”

Policymakers say a Greek-style fate, where a government debt crisis has rattled the euro zone and raised the likelihood of a bailout, is unlikely in Britain.

Britain’s overall debt burden now stands at 59.9 per cent of gross domestic product – less than some of its peers but markets have been worried by the speed at which it has accumulated.