Britain faces further austerity as deficit goals in doubt

Britain’s public finances veered further off track in July after a shortfall in corporation tax revenues and higher spending, putting the government’s deficit goals in doubt and raising the prospect of more austerity on top of planned spending cuts.

After nine months of recession, the unexpected deficit underscored the lack of scope for finance minister George Osborne to give a meaningful boost to the economy — which looked at increased risk of prolonged weakness yesterday as manufacturers reported a slump in orders.

The high deficit also casts doubt over the Conservative-led coalition’s plan to defend Britain’s top triple-A credit rating and hold down borrowing costs, and Osborne may soon face the unpleasant choice of more austerity or missing his goal to close the budget gap within five years.

The public sector finances excluding financial sector interventions — the government’s preferred measure — showed a deficit of £557m (€692m), compared with a £2.8bn surplus in July 2011, the Office for National Statistics said.

Vicky Redwood, economist at Capital Economics, said: “With the recovery falling well short of the OBR’s expectations, we think that the government will struggle to cut borrowing at all next year either.”

Economists said borrowing could overshoot the planned £92bn for this fiscal year by more than £30bn, if the public finances keep deteriorating at the current rate.

The coalition has made the reduction of Britain’s record deficit the cornerstone of its policies, but calls to soften the austerity drive have been growing due to the weak economy.

The recent Olympics have lifted Britons’ spirits and may have generated some money, but the economy remains stifled by business and consumer fears about the raging eurozone debt crisis.

The government had originally planned to eliminate the structural budget deficit by 2015 with a tough programme of spending cuts and tax rises.

But the weak economy has forced it to extend the planned fiscal consolidation by another two years and prime minister David Cameron has warned austerity could last until 2020.

“We expect the Office for Budget Responsibility to revise up its forecast for borrowing and believe the government will eventually have to announce more fiscal measures in order to meet its fiscal mandate,” Nomura economist Philip Rush said.

Last month, the International Monetary Fund said Britain could need to cut taxes or boost investment spending to support growth.

— Reuters


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