What the analysts are saying about July's public sector deficit

This morning, the Office for National Statistics said the UK government posted a £62m deficit in July - down from an £823m surplus the year before (full story here).

Here's what analysts are saying about the figures.

Martin Beck, UK economist at Capital Economics:

Despite signs of life in the economy, July’s public finances data suggest that these are being slow to support the fiscal figures. Admittedly, the impact of the economic recovery on the public purse may start to come through soon. But for now, the picture of a stubbornly high deficit persists….

This means that total underlying borrowing (ex-Royal Mail and APF transfers) of £36.8bn in the first four months of 2013/14 is now running ahead of the £35.2bn borrowed in the same period in 2012/13. Stripping out all recent temporary factors (such as the Swiss tax deal), on an annual basis, borrowing remains doggedly high at around £120bn.

Nonetheless, there are some causes for optimism. For a start, the ONS warned that the timing of self-assessment receipts can shift between July and August. And although 2013 saw the first July deficit for three years, it is worth noting that July 2012 was initially reported as a deficit, only to be subsequently revised up to a surplus.

Moreover, there were some signs that recovery may be starting to feed into tax receipts. Total receipts, excluding APF transfers, were up 3.5% y/y, with income tax and capital gains tax receipts growing by 5.8%. However, corporation tax revenues were down almost 1%. And decent overall receipts growth was not enough to offset a rise in central government spending of 3.7%, driven by increases in social security and departmental outlays.

With improvements in the public finances typically lagging upturns in the economy, the recent run of strong economic data should eventually make its presence felt in the borrowing data. But it looks like the Chancellor will have to bide his time for now.

Rob Wood, chief UK economist at Berenberg Bank:

With a pinch of luck and a dash of growth, the UK fiscal position should start to look a bit better over the next few quarters. But the data for July out today were disappointing, breaking the run of positive UK data surprises, as the government recorded its first July deficit for three years....

There should be better news for Mr Osborne in the coming months as growth significantly beats the expectations built into the fiscal forecasts. The official growth projections for this year now look too pessimistic. We expect the economy to grow four times faster in the third quarter than the 0.2% qoq factored into the March Budget, for instance.

Notwithstanding today’s disappointment, growth’s return should pull more taxes into the government’s coffers while cutting spending by reducing unemployment. The potential for future revisions and problems with the timing of tax receipts are also reasons not to get too excited by today’s numbers.

The July figures can be difficult to judge because it is a big tax month and those receipts can end up coming in late, during August, rather than July.

The UK’s fiscal position remains poor after the spending splurge before the financial crisis and the effects of the recession. The deficit is high and will take many years of sustained growth and austerity to correct.

Plenty of big risks still loom large. Growth could falter next year if real wages do not being growing. Eurozone worries could flare up again. And pumping up the housing market could end in tears.

But for now a return to growth from stagnation is welcome and we are optimistic that it will kick-start a more sustainable expansion that should, along with austerity measures, gradually put the government’s finances on a firmer footing.