Chancellor of the Exchequer George Osborne faced renewed warnings that Britain risks losing its top credit rating after the budget deficit widened last month as a struggling economic recovery weighed on company profits.
The shortfall excluding government support for banks was 15.4 billion pounds ($24.4 billion) compared with 14.8 billion pounds a year earlier, the Office for National Statistics said in London Tuesday. The median of 23 estimates in a Bloomberg News survey was for a deficit of 15.2 billion pounds. Spending rose 5.4 percent and revenue climbed 3.6 percent.
Standard and Poor’s last month became the third ratings company to warn that Britain could be stripped of its top-notch ranking after Osborne conceded it is taking longer than planned to repair the public finances. Investors are now demanding more yield to hold U.K. government debt, pushing borrowing costs to an eight-month high.
“The fiscal position is likely to drift further off course as the U.K. veers towards a triple-dip recession,” said Rob Wood, an economist at Berenberg Bank in London and a former Bank of England official. “There is only so long that the chancellor’s combination of smoke and mirrors and optimistic growth assumptions can disguise the problem.”
Corporation-tax receipts rose 0.2 percent in December from a year earlier and were down 7.1 percent in the fiscal year to date, reflecting the impact of weak growth on company profits and shutdowns of North Sea oil and gas production.
Spending was boosted largely by a 6.5 percent increase in departmental outlays last month. Welfare costs increased 3.3 percent. Net investment was little changed at 2.4 billion pounds.
Pound, Gilts
The pound climbed against the dollar and was trading at $1.5860 as of 11:24 a.m. in London, up 0.2 percent on the day. Ten-year gilt yields were little changed at 2.05 percent. They touched 2.14 percent on Jan. 4, the most since April 30. The rate fell to a record-low 1.407 percent on July 23. Ten-year gilts yield 18 basis points more than similar-maturity U.S. Treasuries. The rate was 17 basis points below Treasuries as recently as August.
The deficit climbed to 106.5 billion pounds in the first nine months of the fiscal year, compared with 99.3 billion pounds a year earlier. The figures exclude a one-time boost from the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets to the public sector in April last year. The Treasury’s fiscal watchdog, the Office for Budget Responsibility, predicts an underlying deficit of 120 billion pounds for the full fiscal year.
‘Overly Aggressive’
The report sparked new accusations that Osborne is trying to cut the deficit too quickly and stifling growth in the process. The economy probably shrank 0.1 percent last year and will grow just 1.1 percent this year, according to a survey of economists published on Jan. 17.
Former Bank of England policy maker Adam Posen told lawmakers in London today the government’s austerity program is “overly aggressive.” Rachel Reeves, a Treasury spokeswoman for the opposition Labour Party, said budget cuts are hurting, not working.
Osborne and Prime Minister David Cameron are “failing on the one test they set themselves -- to get the deficit and debt down,” she said in an e-mailed statement. “This is borrowing to pay for economic failure as a flat-lining economy and rising long-term unemployment have sent the welfare bill soaring and tax revenues have been revised down.”
A cash measure showed the public finances in deficit by 1.3 billion pounds. The central government cash deficit, which excludes the finances of publicly controlled banks, was 22 billion pounds. Net borrowing including financial interventions was 13.2 billion pounds. Net debt climbed to 1.11 trillion pounds, or a record 70.7 percent of gross domestic product.
4G Spectrum
Osborne has been criticized for counting 3.5 billion pounds from the planned sale of 4G mobile-phone spectrum licenses against the deficit this year, along with 11.5 billion pounds from the transfer of income the Bank of England has accrued on its asset-buying program.
The ONS said the transfer of Bank of England gilt-coupon income began in January and will be reflected in the public finance figures published next month. Proceeds from the 4G sale will be known at a later date. There will also be a small downward effect on the deficit from a decision to reclassify nationalized mortgage lenders Northern Rock Plc and Bradford & Bingley Plc as part of central government.
S&P said last month there is a one-in-three chance it will cut its AAA rating in the next two years after joining Fitch Ratings and Moody’s Investors Service in downgrading Britain’s outlook to negative.
Badge of Creditworthiness
Such a move would be embarrassing for Osborne and Cameron, who have made the top rating a badge of creditworthiness that separates Britain from debt-strapped euro-area nations such as Spain, although it may have little market impact.
French 10-year yields fell last year despite the country losing its top rating with Standard & Poor’s and Moody’s Investors Service. The U.S., meanwhile, has been deemed more creditworthy by investors since S&P stripped the nation of its AAA grade in 2011, with 10-year note yields dropping to a record low.
The Treasury said in a statement the deficit figures show the economy is healing slowly, with borrowing down by a quarter since 2010 and more than a million private-sector jobs created.
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