Osborne faces £10bn hole in the UK public finances

Ben Southwood
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CHANCELLOR George Osborne is set to run a budget deficit £10bn or more larger than the £119.9bn predicted by the budget watchdog during the 2012-13 fiscal year, economists said yesterday.

January’s public borrowing figures, released yesterday by the Office for National Statistics (ONS), looked positive on the surface, analysts said, with a larger-than-expected surplus of £11.4bn, £5bn better than last year.

But analysts said this figure was flattered by seasonal strength in tax revenues and one-off transfers from the bank fund, known as the Asset Purchase Facility (APF), that carries out quantitative easing (QE) by buying gilts.

“Excluding all the one-off transfers that muddy the waters, borrowing was £7.5bn higher in the first 10 months of the current fiscal year than in the previous fiscal year,” said chief Berenberg Bank economist Robert Wood.

Since the 4G auction brought in £1.2bn less than built into the budget numbers, the budget could be £10bn worse than predicted by the OBR in the Autumn Statement, Wood forecast, echoing other economists’ numbers.

“Osborne is very unlikely to be able to say the deficit is falling in his 20 March budget unless he can find some other ways of massaging the figures,” Wood warned.

But the Treasury tried to shift focus onto spending, which was down £2bn compared to the same month a year earlier, and receipts, which were up, even excluding one-off moves, it said.

Economists also criticised the Treasury for the level of “unnecessary complexity” in the finances.

“All of the messing around with numbers makes it very difficult to see the direction we’re going in,” Item’s Andrew Goodwin said.

Goodwin said all the different ways official bodies state the deficit and borrowing numbers can confuse even economic experts.

And the ONS decision yesterday morning to allow only £9.1bn of intra-government transfers into the official borrowing numbers over the tax year confused matters further. Since £2.7bn of this was already taken up by previous transfers, even on the government’s figures, which include one-off QE transfers, it will only be able to include £6.4bn out of an expected £11.5bn in its borrowing numbers.


Q and A

Q Is borrowing going down – as George Osborne said he thought it would in the Autumn Statement – or is it rising?

A So far, 10 months into the 2012-13 fiscal year, borrowing was £65.8bn – £26.5bn lower than during the same period in 2011-12. But this includes some one-off windfalls. Excluding the transfer of the Royal Mail pension plan, and the Treasury’s raid on quantitative easing (QE) income, borrowing was £97.6bn, and therefore £5.3bn up on 2011-12. Further excluding the £2.3bn money gained from winding down the Special Liquidity Scheme, it was £7.5bn higher.

Q So will Osborne officially miss the Office for Budget Responsibility’s (OBR) target?

A The OBR forecast borrowing would be £119.9bn over the year. Economists are now forecasting Osborne will overshoot the target by £10bn-£15bn. That is due to higher borrowing and also because the OBR assumed £11.5bn gained from raiding the Bank of England’s QE income. Actually this can only bring in a maximum of £6.4bn, as the target is for public sector net borrowing, which was yesterday defined to not include all the QE income. The OBR also assumed a £3.5bn gain from this week’s 4G auction (it brought in £2.3bn).