LONDON, June 21 (Reuters) - A windfall payment of tax by Swiss banks caused Britain’s public finances to post a smaller than expected deficit in May, but Britain’s total net debt still rose to a record high.
Deficit reduction is the central economic policy of Britain’s Conservative-led coalition, which came to power in May 2010 when Britain’s budget deficit was more than 11 percent of annual economic output - one of the highest for a major economy.
The government’s preferred measure of Britain’s public borrowing, which strips out some of the effects of its bank bailouts, showed a deficit of 8.772 billion pounds in May, the Office for National Statistics said on Thursday.
This is almost half the 15.629 billion pounds in May 2012 and well below analyst forecasts of a deficit of 12.6 billion pounds in a Reuters poll, largely because the ONS booked a 3.2 billion pound tax payment from Swiss banks during the month.
The remainder of the decline was largely accounted for by a 3.9-billion-pound cash transfer from the Bank of England under a controversial deal reached last year to return interest payments on the BoE’s massively increased gilt holdings to the government.
Britain reached a deal with Switzerland in January to settle the tax affairs of its citizens with undeclared bank accounts in the Alpine country, which has led to a large one-off payment, the exact timing of which had not been previously certain.
On an underlying basis - stripping out the effect of cash transfers from Royal Mail and the Bank of England - the government is aiming for a deficit of no more than 120 billion pounds or 7.5 percent of GDP this year, only a fraction lower than its share of GDP in the 2012/13 tax year.
For the first two months of the current tax year, the deficit on this measure totalled 21.4 billion pounds, compared to 24.3 billion at the same point in 2012, with the fall more than accounted for by the Swiss tax payment.
Although the government has succeeded in curbing departmental spending, weak economic growth has limited tax revenues and made it harder to cap social benefit costs, effectively causing deficit reduction to stall in the past year.
Next week finance minister George Osborne is due to set out plans for public spending restraint out until April 2016 - a year after the 2015 national election. While he set out the total amount of spending in his March budget, individual departments have yet to find out how much they will receive.
Britain’s total net public debt, excluding the direct costs of bailing out the country’s banks, is still much higher than before the financial crisis at some 1.1892 trillion pounds or 75.2 percent of GDP.
This is a record sum in cash terms, and the highest ever share of GDP for a month of May.