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U.k. August Budget Deficit Swells On Spending Growth

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Sept. 24 (Bloomberg) -- The U.K. had a larger budget deficit than economists forecast in August as spending jumped and revenue from profits fell, piling pressure on the government to save money as income from financial services dwindles.

The 9.1 billion-pound ($18.4 billion) shortfall was the highest for the month since records began in 1993, the Office for National Statistics said in London today. It exceeded the median 6.5 billion pounds forecast in a Bloomberg survey of 20 economists.

Spending grew twice as fast as revenue, making it harder for Chancellor of the Exchequer Alistair Darling to cut borrowing. At the same time, revenue may be eroded as the collapse of the U.S. subprime mortgage market hits the profits of banks and cools a decade-long housing boom.

``The financial services sector and corporations have been providing a lot of revenue, and if that slows the near-term outlook for public finances will look worse,'' said Nick Kounis, an economist at Fortis Bank in Amsterdam who formerly worked on budgetary affairs at the U.K. Treasury.

Government income rose 3.6 percent in August from a year earlier. Corporation tax payments almost halved due to rebates, while value-added tax, a levy on sales, fell by 1.6 percent.

Spending rose by 7.4 percent as departmental outlays increased 8.7 percent and higher borrowing costs pushed up interest payments.

Spending Limits

The increase suggests the Treasury is finding it hard to rein in departments after almost a decade of soaring investment in schools and hospitals drove up taxes and borrowing.

Darling has signaled he intends to stick to the tight budget limits set out by his predecessor Gordon Brown, now prime minister, when he fixes funding for each department for the three fiscal years through March 2011 next month.

The clampdown risks a confrontation with government workers angered at pay increases that are less than inflation, and with Brown refusing to rule out holding an election before the 2010 deadline, pressure for more spending is likely to grow.

``Attempts to cut spending quite substantially over the coming years will be tough to balance with political considerations,'' Kounis at Fortis Bank said.

Worsening Outlook

Unlike Brown, who enjoyed the strongest economic growth in more than a decade during his first years as chancellor, Darling faces a worsening outlook that may imperil plans to cut the deficit by a third by 2012.

At worst, subprime mortgage losses and the credit squeeze they triggered could shave as much as 1 percentage point from the pace of growth in 2008 and 2009, costing the Treasury billions of pounds in lost revenue, Ernst & Young said Sept. 14.

James Knightley, an economist at ING Financial Markets in London, this month cut his forecast for economic growth in 2008 to 1.7 percent from 1.8 percent. In March, the Treasury forecast growth of as much as 3 percent.

London bankers' bonuses may fall to 7.5 billion pounds this year from a record 8.8 billion pounds in 2006 as higher borrowing costs paralyze leveraged buyouts and mergers, the Centre for Economics and Business Research said Sept. 18.

``The Treasury will doubtless be concerned that the recent problems in banks and financial markets will reduce the tax payments it receives from the financial sector, an unusually important source of revenue for the U.K.,'' said Gemma Tetlow, a research economist at the Institute for Fiscal Studies in London.

Golden Rule

Tax receipts rose 5.1 percent in the first five months, less than the 6.8 percent the Treasury forecasts for the full fiscal year. Corporation tax receipts fell 3.1 percent. Spending, up 6.4 percent on the year since April, is running ahead of the 6 percent growth projected by the Treasury.

Darling says Britain will continue to meet a golden rule that the government raises enough tax revenue to cover day-to- day spending and borrows only for investment over the economic cycle.

Excluding investment, the budget deficit in the first five months was 11.7 billion pounds, 3.1 billion pounds more than the same period a year earlier, the statistics office said. In August, the deficit was 7 billion pounds, the highest for the month since records began in 1998.

A cash-based budget measure that indicates how much the government will need to borrow through bond sales was in deficit by 5 billion pounds in August, the most for the month since 1984, the statistics office said. It compares with the median 3.5 billion pounds in a Bloomberg survey of 23 forecasts.

The statistics office also announced that it would reclassify Metronet Rail and Tubelines to the public sector from the dates in 2002 and 2003 they signed their public-private partnership contracts with London Underground. The move would add to net debt by the equivalent of 0.1 percent of gross domestic product. Debt stood at 36.7 percent of GDP in August.

The government guarantee of deposits at Northern Rock Plc, which recently sought an emergency bailout from the Bank of England, are classified as a ``contingent liability'' and therefore don't appear on the balance sheet, the office said.

What dreadful figures!

Is this why the money supply is high ?

Edited by Ash4781

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