John McLaren: With a third of the year now gone, the fiscal position is a lot worse than had been hoped
THE UK borrowing figures highlight a number of worrying issues. The overall position for July looks quite good, only a small deficit, but July is one of the months when a surplus is expected, even within an annual deficit, due to high quarterly tax payments.
In 2011 the surplus was just under £3 billion; this year it plunged to a deficit of £0.6bn.
The main culprit was corporation tax (CT), down 20 per cent on receipts from last July. In comparison, other revenues sources, from income tax, capital gains tax, National Insurance contributions and VAT, behaved largely as expected.
The main cause of the corporation tax slump was problems in the North Sea reducing production levels, in particular related to the Elgin gas leak.
On the expenditure side, the main problem was with social benefits payments, which were up more than 6 per cent on a year ago. Debt interest payments were substantially down on a year ago, but these are relatively small, while other current expenditures, in this case relating to grant payments to local authorities, were up almost 8 per cent.
The social benefit payments figures add to the mystery of why the UK labour market appears to be performing well, while GDP is flatlining and, as we now see, social benefits are rising sharply.
Overall, the UK’s fiscal position is a lot worse, with a third of the year now gone, than had been hoped for. After adjusting for the one-off impact of the Royal Mail Pension Fund transfer, the Office for Budget Responsibility (OBR) had forecast a £5bn improvement in Public Sector Net Borrowing (PSNB) this year, from -£125bn in 2011-12 to -£120bn in 2012-13. So far, the PSNB has worsened by over £9bn instead.
While it is still early days, these figures do not bode well for the year as a whole.
If the trends of the first four months continue for the rest of the year, this could result in a PSNB for 2012-13 of over £150bn. There is certainly a danger of something like this happening, as OBR notes that North Sea production levels are expected to remain low due to unusually high levels of maintenance. If so, this would leave the PSNB for 2012-13 above even the 2010-11 figure and mean we are going backwards instead of forwards.
This means the coalition’s fiscal plans look very difficult to meet without either fast growth re-emerging or a further cut in public expenditure. The alternative, of course, is to recalibrate the fiscal targets to accommodate for the worsening fiscal fortunes, or to introduce a fiscal stimulus.
• John McLaren is an economist with the Centre for Public Policy for Regions.
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