UK budget deficit narrows after VAT and corporation tax boost

Britain’s public sector budget deficit narrowed more than expected in April, giving the chancellor, George Osborne, a boost as he renews his push to fix the country’s public finances.

The Office for National Statistics said public sector net borrowing, excluding state-controlled banks, totalled £6.8bn in April, down nearly 27% from a year earlier and the lowest shortfall for that month since 2008. Economists taking part in a Reuters poll had forecast a shortfall of £8.1bn.

The public coffers were swelled by the highest VAT haul for April – the first month of the financial year – since records began in the 1997/98 financial year and the highest corporation tax revenues for the month since 2008.

Income tax revenues also rose to £11.6bn, the highest amount for April in two years as Britain’s economic recovery translated into more tax receipts.  

Also helping narrow the deficit, central government spending fell including a nearly 7% reduction in interest payments as Britain’s ultra-low inflation reduced the government’s bill on inflation-linked bonds.

Osborne aims to wipe out the deficit by 2018-19 after his Conservative party unexpectedly won a parliamentary majority in the 7 May election, paving the way for further spending cuts.

He had originally planned to eliminate the deficit by 2015 when the Conservatives and the Liberal Democrats formed a coalition government after the 2010 election. Instead, he managed to halve the deficit to just under 5% of gross domestic product.

Revised figures published by the ONS showed borrowing in the 2014/15 tax year totalled £87.7bn compared with an earlier estimate of £87.3bn and a government goal of no more than £90.2bn. In March, Osborne said he wanted to reduce borrowing to £75.3bn this financial year, equivalent to 4.0% of GDP.

The chancellor is due to spell out a new budget on 8 July and has promised further cuts to welfare and government departments’ spending.

The International Monetary Fund has raised doubts about whether Osborne can hit his targets, and many economists are sceptical that he can eliminate the deficit without raising taxes.

Public sector net debt, excluding state-controlled banks, totalled £1.488tn in April equivalent to 80.4% of GDP. Osborne aims to start bringing the ratio down in the 2015-16 financial year.

Source: The Guardian , United Kingdom, dated 22/05/2015