September 24, 2019 / 8:47 AM / 22 days ago

UK borrowing plans thrown off target by higher spending and student loans

LONDON (Reuters) - The British government’s plan to keep its budget deficit under 2% of national income was thrown off course on Tuesday when statisticians sharply revised up borrowing figures and highlighted rising public spending.

FILE PHOTO: Britain's Chancellor of the Exchequer Sajid Javid speaks during the weekly question time debate in Parliament in London, Britain, September 4, 2019, in this screen grab taken from video. Parliament TV via REUTERS/File Photo

The tricky news for new finance minister Sajid Javid - just weeks before Britain is due to leave the European Union on Oct. 31 - shows borrowing on the rise even ahead of the big spending rises he announced earlier this month take effect.

The Office for National Statistics revised up its estimate of government borrowing for the last financial year to 1.9% of gross domestic product from 1.1%, largely due to a ruling that billions of pounds of student loans are unlikely to be repaid.

While the change to the treatment of student loans had been long planned, the effect was amplified by new accounting for public-sector pensions and the discovery that revenue from tax on company profits last year had been overstated.

“Combined with the spending increases announced in the spending round, (this) suggests that the chancellor’s fiscal target is dead in the water,” economist Andrew Wishart of consultancy Capital Economics said.

Earlier this month Javid told parliament he still aimed to keep public borrowing below 2% of GDP during the next financial year, even after announcing plans to raise day-to-day spending on public services by more than 4% above inflation.

Javid said he was “turning the page on austerity” as he promised the biggest spending increases in 15 years, a move widely seen as part of Prime Minister Boris Johnson’s push for an early election to break the Brexit impasse.

FIRST BUDGET

Despite the statistical revisions, British public borrowing last year remained the lowest since 2001/02, down from a peak of 10.2% of GDP reached in 2009/10 just after the depths of the financial crisis.

Borrowing for August alone was also slightly lower than economists polled by Reuters had expected, at 6.418 billion pounds versus a forecast 7.15 billion pounds.

This was down 7% from last August, but cumulative borrowing since this financial year started in April was up by 28% on the same period in 2018 at 31.2 billion pounds.

Total borrowing last year was 41.4 billion pounds, on the new ONS calculations.

“Stronger than expected spending growth is fuelling a faster rise in the deficit than we forecast in March,” said the Office for Budget Responsibility, which is in charge of government budget forecasts.

The OBR said it estimated the ONS’s statistical changes would add at least 15 billion pounds a year to British public borrowing, though it will not produce fully revised forecasts until Javid holds his first budget later this year.

On Saturday the Financial Times reported Javid wanted to hold this during the week starting Oct. 21, but that this would hinge on parliament having approved a deal to leave the EU. If a no-deal Brexit was probable, the budget would be delayed until afterwards, when the impact was clearer.

In July the OBR predicted borrowing could jump by 30 billion pounds a year by 2020/21 if Britain leaves the EU without a transition deal on Oct. 31, triggering a recession.

Tuesday’s statistical changes had less impact on public sector net debt, the total amount of money that Britain’s government owes. This stood at 1.78 trillion pounds or 80.9% of GDP in August, excluding public-sector banks, down from a post-financial crisis peak of 85.1% in October 2017 but still double pre-crisis levels.

Editing by Alison Williams

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