UK unexpectedly posts deficit as tax receipts plunge

Corporation taxes fell £1.7b in July from a year earlier

17:02 August 21, 2012

London: Britain unexpectedly posted a budget deficit in July as corporation-tax receipts plunged, partly due to the closure of the Elgin gas field in the North Sea.

The shortfall, which excludes government support for banks, was £557 million (Dh3.2 billion, $878 million) compared with a surplus of £2.84 billion a year earlier, the Office for National Statistics said in London yesterday. The median of 17 forecasts in a Bloomberg News survey was for a surplus of £2.2 billion. Tax revenue fell 0.8 per cent and corporation tax plunged 19.3 per cent. Government spending rose 5.1 per cent.

While the drop in revenue was largely centred on company taxes, the UK’s struggle to climb out of a recession has raised concerns that Chancellor of the Exchequer George Osborne will miss his forecast for a deficit of £120 billion in the current fiscal year. Osborne has resisted demands to ease the pace of his fiscal squeeze, saying his plans have helped to insulate Britain from the euro-area debt crisis.

“The figure highlights the huge challenges facing the UK in restoring stability to its public finances,” British Chambers of Commerce Chief Economist David Kern said. “To maintain credibility, we need to persevere with spending cuts, but supplement them with forceful policies to boost growth.”

The National Institute for Economic and Social Research predicts that Osborne will miss his target for the fiscal year ending March 2013 and forecasts a deficit of 138.5 billion pounds.

Corporation taxes fell £1.7 billion in July from a year earlier, the statistics office said. July is traditionally a big month for company taxes and about £1 billion of the decline was due to the oil and gas industry, where Total SA’s Elgin field was shut down after a leak was discovered in March. A decline in oil prices also affected receipts from the industry.

In the first four months of the fiscal year, the deficit widened to £44.9 billion from £35.6 pounds a year earlier. The figures exclude a one-time boost in April from the £28 billion transfer of Royal Mail Group Ltd pension assets to the public sector.

Government spending rose 3.5 per cent in the period, the statistics office said. Tax receipts were up 1.1 per cent, lagging behind the OBR’s 3.9 per cent full-year forecast. Corporation taxes fell 10.4 per cent in the April-July period compared with a year earlier.

“This will raise pressure on the government to keep the fiscal plan on track,” said Alan Clarke, an economist at Scotiabank in London. “Tighten more to make up for lost ground, or loosen a little and hope that the extra growth delivers better public finances.”

A cash measure showed the public finances in surplus by £22.9 billion in July. Net debt amounted to £1.03 trillion, or 65.7 per cent of gross domestic product. It reached a record 66.2 per cent of GDP in June.

The statistics office also said that net borrowing in the fiscal year that ended in March was £125 billion, £700 million lower than previously estimated.

Britain’s economy shrank for a third straight quarter in the three months through June, fuelling accusations from the opposition Labour Party that the pace of the government’s fiscal squeeze is making things worse. Osborne says his programme has helped to push down borrowing costs.

The yield on the 10-year gilt was at 1.67 per cent as of 11:12am in London, down from about 3 per cent two years ago. The yield fell to a record low of 1.407 per cent on July 23. Spain’s 10-year bond yield was at 6.22 per cent today, while Italy’s was at 5.7 per cent.

Also in the UK on Tuesday, the Confederation of British Industry said its index of manufacturing orders fell to minus 21 in August, the lowest in eight months, from minus 6 in July. A gauge of export orders declined to the lowest since January.

“The economic environment for UK manufacturers remains challenging, with domestic demand relatively muted and the ongoing euro-zone crisis now seeming to drag on broader global economic momentum,” said Anna Leach, the CBI’s head of economic analysis in London.

Osborne has lost the support of a group of economists who wrote an open letter before the last election supporting his fiscal squeeze, the New Statesman reported on August 15. Only one of the 20 economists who put their names to the letter in February 2010 “was willing to repeat his endorsement,” the London-based magazine said.