August 21, 2019 / 8:43 AM / a month ago

UK expenditure strains budget as Johnson eyes more spending

LONDON (Reuters) - Higher government spending ate into Britain’s seasonal budget surplus in July, underlining the budget constraints facing Prime Minister Boris Johnson, who has promised to boost outlays as he prepares the country for Brexit.

A bird flies as the sun rises behind the city of London financial district in London, Britain August 20, 2019. REUTERS/Hannah McKay

The surplus, excluding state-owned banks, stood at 1.319 billion pounds, below all forecasts in a Reuters poll of economists and down from 3.562 billion pounds in July 2018, official data showed on Wednesday.

July is usually a strong month for the public finances as income tax payments from individuals bolster revenues.

While most tax receipts edged up compared with a year ago, government spending was 2.6 billion pounds higher, a 4.2% annual increase driven by purchases of goods and services and staff costs.

In the first four months of the financial year starting in April, Britain borrowed 16.0 billion pounds, up 60% compared with a year ago.

While the increase represents a change in direction after a decade of tight spending restraints to bring down the deficit, the shortfall as a share of the economy remains small at around 1% of gross domestic product.

In the longer-term, the outlook for the public finances is clouded by Brexit and uncertainty around government spending.

“With the new prime minister’s apparent shift in focus away from balancing the government’s budgets, we are likely to see rising levels of borrowing in the coming months,” Josie Dent, senior economist at consultancy Cebr, said.

“Furthermore, with a recession possibly on the way, government intervention may be needed to stimulate the economy.”

Britain’s economy shrank 0.2% in the second quarter, a hangover from the stockpiling boom in early 2019 in advance of the original Brexit deadline in March.

While most economists expect a modest rebound in the current quarter, weak business surveys suggest there is a small chance of another contraction, the technical definition of a recession.

Johnson has made billions of pounds of new spending commitments in his first few weeks in office, even before the potential costs of a disruptive, no-deal Brexit are taken into account.

Ratings agency Moody’s said on Aug. 1 that some of the announcements raised questions about Johnson’s commitment to bringing down high levels of public debt.

Finance minister Sajid Javid will give details of his spending plans next month, before a full annual budget later in the year - assuming Johnson is able to remain prime minister.

So far this financial year, tax revenues paid by individuals have risen but businesses taxes are showing signs of a slowdown — chiming with other data showing a solid consumer economy but a downbeat corporate sector ahead of Brexit.

The Office for National Statistics said corporation tax revenue for the first four months of the 2018/19 fell 0.1% — the first drop for any comparable April-July period since 2013/14.

From next month, the public finances data will incorporate changes to the treatment of student loans as government borrowing which is likely to put further strain on the budget.

Separate data on Wednesday showed Scotland’s budget deficit fell to a seven-year low but remained much larger as a share of the economy than in the rest of Britain.

(This story corrects penultimate paragraph to show student loans will be treated as government borrowing, not debt).

Reporting by Andy Bruce; Editing by William Schomberg and Hugh Lawson

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