UK budget deficit worsens, credit rating at risk

LONDON Fri Dec 21, 2012 10:44am EST

A man sits on a wall in the Canary Wharf financial district of London, April 1, 2009. REUTERS/Simon Newman

A man sits on a wall in the Canary Wharf financial district of London, April 1, 2009.

Credit: Reuters/Simon Newman

LONDON (Reuters) - Britain's budget deficit worsened in November, data showed on Friday, increasing the risk it will lose its top-notch credit rating and overshoot this year's borrowing forecast.

The data - which showed public sector net borrowing, excluding financial sector interventions, hit 17.5 billion pounds ($28.5 billion) last month - is gloomy news for Britain's coalition government.

Deficit reduction and preserving Britain's credit rating have been top goals for the coalition of Conservatives and Liberal Democrats, which came to power in June 2010, just after the country's budget deficit peaked at 11.2 percent of GDP.

Last year, the budget deficit totaled 8 percent of GDP, and the government's own budget watchdog forecasts it will take until 2017 before it falls below 3 percent and the government manages to run a surplus on cyclically-adjusted non-investment spending.

Finance minister George Osborne had originally planned to meet this goal by the next election in 2015, but far weaker than expected growth since 2010 now makes that look impossible.

While other official data released on Friday showed Britain's economy may avoid a forecast contraction in the last three months of 2012, analysts say the borrowing numbers could see the country's credit rating revised early next year.

"The disappointing November public finance data fuel mounting expectations that at least one of the credit rating agencies will strip the UK of its AAA rating in 2013," said Howard Archer, chief UK economist at IHS Global Insight.

Standard & Poor's last week joined Fitch and Moody's and put a negative outlook on its triple-A rating for Britain. The latter two agencies - which have had a negative outlook since early this year - will review their ratings in early 2013.

Last month's public sector net borrowing figure of 17.5 billion pounds exceeded economists' expectations. They had forecast it would come in just below the 16.3 billion pounds reached in November 2011.

Borrowing since the start of the tax year in April is now nearly 10 percent higher than at the same point in 2011.

This calls into question forecasts issued earlier this month by the government's budget watchdog which estimated borrowing will fall 11 percent to total 108.5 billion pounds in the 2012-13 tax year.

Some of the fall in borrowing forecast by the Office for Budget Responsibility (OBR) was due to money expected from the auction of next-generation mobile phone frequencies and a deal with the Bank of England to return interest paid on its bond holdings - cash that will not boot the public finances until early 2013.

But even disregarding this, some economists think Osborne, the finance minister, may struggle to hit the OBR's targets.

Archer expects an overshoot of some 14 billion pounds, while economists at Barclays see an overshoot of 6.5 billion pounds, assuming the radio spectrum auction brings in the 3.5 billion pounds penciled in by the OBR.

WEAKER GROWTH

Britain's economy shrank for nine months between late 2011 and mid-2012, but revised figures from the Office for National Statistics showed on Friday that growth rebounded by 0.9 percent in the third quarter of 2012, a little less than the 1.0 percent first estimated.

There was slightly brighter news from Britain's dominant services sector, which grew 0.1 percent in October after a 0.6 percent decline in September.

This was better than many economists had expected, and raises the prospect that the economy will avoid a return to contraction that the OBR and the Bank of England have predicted.

"It's not a great number but it is positive," said Ross Walker, an economist at Royal Bank of Scotland. "On the basis of all the published data it looks like the fourth quarter will be broadly flat, rather than negative."

Another bright spot was third-quarter current account data, which showed Britain's deficit with the rest of the world narrowed more than expected to 12.8 billion pounds, equivalent to 3.3 percent of GDP, from 17.4 billion in the second quarter.

However, economic growth will need to translate into stronger tax revenues and lower spending on social benefits if the government is to meet its budget goals.

November's budget overshoot was driven by a 6.3 percent year-on-year rise in central government spending, while tax revenues grew just 0.6 percent.

The closure of a North Sea oil field earlier this year has done major damage to corporation tax revenues, but Barclays economist Blerina Uruci said she was more concerned about signs that spending by government departments was rising more than expected.

"It could suggest difficulties with delivering efficiency savings as austerity fatigue sets in," she said.

The OBR said it expected to see under spending by government departments towards the end of the fiscal year, as well as stronger future growth in income tax and sales tax revenues.

Business minister Vince Cable sought to play down worries about the state of public finances, saying more austerity than planned could tip the economy back into recession.

"The fact that there has been a temporary increase in borrowing I don't think is a matter for criticism," he told BBC radio. "The government ... have been flexible, just accepting that when the economy slows down you are going to get bigger deficits (and) the government has to borrow to cover them."

However, the opposition Labour Party said Friday's data showed there had already been too much austerity.

"By squeezing families and businesses too hard, choking off the recovery and so pushing borrowing up, not down, (Prime Minister) David Cameron and George Osborne's economic plan has completely backfired," said Labour legislator Rachel Reeves.

(Additional reporting by Charlie Pollard, Li-mei Hoang and Peter Griffiths; Editing by Ruth Pitchford and Andrew Osborn)

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