UK budget deficit ‘worst on record’

Britain’s budget deficit widened to the biggest on record for any August, data showed yesterday, a day after the central bank governor said overshooting budget targets may now be acceptable.

The government said a weak economy pushed down corporation tax receipts and drove up benefit payments.

As a result, public sector net borrowing excluding financial sector interventions — the government’s preferred measure — rose last month to £14.410bn from £14.365bn in Aug 2011.

That was the highest for any August since records began in Jan 1993.

Finance minister George Osborne, who has made reducing the deficit a central plank of his policies, may soon face a tough choice between imposing more spending cuts or abandoning his goal of ensuring that the debt-to-GDP ratio starts falling by 2015.

Late on Thursday, Bank of England governor Mervyn King — a firm supporter of the government’s efforts to cut the budget gap — said missing the reduction goal would be acceptable if the reason was weakness in the global economy.

In March, the state forecasting body — the Office for Budget Responsibility — predicted public sector net borrowing would amount to 5.8% of GDP in the 2012/13 fiscal year. Economists said that target now looked unattainable.

By way of contrast, countries in the eurozone — deemed to be in a debt crisis that Britain has largely escaped if its record low borrowing costs are any guide — are striving to shrink their budget deficits to 3% of GDP over the next year.

“The (UK) overshoot is a result of reduced corporate tax receipts and increased government benefit costs,” RBS economist Ross Walker said. “In an absolute sense they’re bad numbers, but they’re consistent with the overall trend.”

David Tinsley, an economist at BNP Paribas, said the government now risked missing its targets by as much as £20bn.

In his annual autumn statement on Dec 5, Mr Osborne is likely to face a downgrade in the OBR’s growth forecast, as well as a gloomier prediction for the budget deficit.

He is already under pressure to loosen his austerity drive as Britain’s economy is struggling to move out of recession.

Bank of England policymaker Spencer Dale said earlier yesterday the economic backdrop was still “pretty challenging”, but that there were encouraging signs from local businesses that access to bank finance was becoming easier due to the BoE’s new Funding for Lending Scheme.

Borrowing in the fiscal year to date actually fell to £31.003bn from £48.446bn in the Apr-Aug period 2011.