U.K. Budget Deficit Widens to Record on Spending

U.K. Budget Deficit Widens to Record on Spending

April 18 (Bloomberg) -- Britain had a 10.2 billion-pound ($20.4 billion) budget deficit in March, a third more than economists forecast, as capital investment increased.

The shortfall was the largest for the month since records began in 1993 and widened from 7.1 billion pounds a year earlier, the Office for National Statistics in London said today. The median forecast in a Bloomberg survey of 17 economists was 7.8 billion pounds.

U.K. gilts extended losses on concern Britain may sink deeper into deficit as a worsening economic slowdown erodes taxes on everything from home purchases to bankers' bonuses. Economists and opposition parties say Chancellor of the Exchequer Alistair Darling has little scope to help the economy by cutting taxes after his Labour government let spending soar.

``The public finances are in no way ideally positioned for the slowdown,'' said David Page, an economist at Investec Securities in London. ``They've got almost no room to step up borrowing.''

The yield on the two-year government bond, among the securities most sensitive to the interest-rate outlook, climbed 12 basis points to 4.26 percent. The price of the 4.75 percent security due June 2010 dropped 0.24, or 2.4 pounds per 1,000- pound face amount, to 100.98.

Below Forecast

The budget deficit for the fiscal year through March was 35.6 billion pounds, less than the 36.4 billion pounds Darling forecasts in his budget last month. Borrowing in February was 247 million pounds, 2.4 billion pounds less than first estimated.

Revenue in the last financial year rose 5.7 percent and spending increased 6.1 percent. In March, revenue rose 7.6 percent, helped by a near doubling of corporation tax receipts. Income tax rose 4.4 percent and value-added tax, a levy on sales, rose just 1.7 percent. Spending gained 7.6 percent.

Central government net investment rose 47 percent from a year earlier to 7.5 billion pounds. Borrowing by public corporations outweighed an improvement in the fiscal position of local authorities.

In his March budget, Darling added 20 billion pounds to his deficit forecasts for the four years that began this month as the credit famine roiling financial markets deepens a housing market slump and curbs consumer spending.

His forecast of economic growth of as much as 2.25 percent this year may still be too high, economists say. The International Monetary Fund last week predicted an expansion of 1.6 percent, the least since 1992, the year after Britain had its last recession.

Housing Slump

The economic slowdown ``will significantly undermine value- added tax and corporation tax receipts,'' said Howard Archer, an economist at Global Insight in London. ``Furthermore, sharply reduced housing market transactions and lower house prices will substantially hit stamp duty receipts.''

Further evidence of the property slowdown emerged today when the Council of Mortgage Lenders said the value of home loans fell 17 percent in March from a year earlier. In a separate report, the Bank of England said annual growth in M4, the broadest gauge of U.K. money supply, slowed to 12 percent from 12.4 percent in February.

The Institute for Fiscal Studies, based in London, says the government has almost no room for maneuver if it is to meet its self-imposed fiscal rules.

Golden Rule

The current budget, which measures 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, was in deficit by 7.6 billion pounds in the last fiscal year. The Treasury had forecast a deficit of 7.9 billion pounds.

Net debt, which the government has pledged to keep below 40 percent of gross domestic product, stood at 36.7 percent in March, compared with 36.6 percent a year earlier.

A cash-based measure that indicates how much the government needs to borrow through bond sales was in deficit by 12.7 billion pounds in March. The median forecast in a Bloomberg survey of 22 economists was 18 billion pounds.

The decline in the shortfall from 17.3 billion pounds in March 2007 was partly because spending didn't jump as it did a year earlier, the statistics office said. In the fiscal year, the cash requirement was 26.6 billion pounds.

BLOOMBERG