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UK public finances - spectre of another "borrowing overshoot" rises

22-Jan-2013

Borrowing forecasts remain challenging: UK public finances figures for December 2012 were published today and, just a month on from the Autumn Statement, show the challenge faced by the Chancellor in meeting even the revised borrowing forecasts for the 2012/13 fiscal year. December’s deficit, excluding financial sector interventions, stood at £15.4bn against a market consensus of £15.2bn and our own forecast of £12.6bn. Back revisions to data made today’s reading look just modestly better. Indeed, for the fiscal year to date public sector net borrowing stands at £78.5bn, some £20.8bn lower than in the same period last year, but only because of a one-off windfall from the transfer of Royal Mail pension fund assets and cash from the Special Liquidity scheme, totalling £30.3bn.

‘One-off’ factors help, but not save: Although the OBR’s £80.5bn 2012/13 borrowing forecast looks ambitious, the Chancellor still has a couple more windfalls set to bank in the remainder of the fiscal year. These include £11.5bn from the transfer of Bank of England held gilt coupon cash to the Treasury; the ONS is still officially undecided on how these revenues ‘score’, but these have been built into OBR projections. Secondly the Chancellor is relying on some £3.5bn of revenue from the sale of 4G spectrum licences, with the precise results of the auction set to be known in March. Given these are pencilled into the OBR's 2012/13 fiscal year forecasts we assume the intention is also to accrue these in the March public finance figures. These additional ‘one-offs’ should help the Chancellor get closer to the OBR 2012/13 forecasts, but we still view an overshoot as likely.

Spending firming not falling: On a month to month basis both the borrowing and revenue figures that comprise the public finances are volatile. But we are becoming increasingly nervous about the trend in the spending figures which shows an increasing pace of growth in current spending since last summer. On a rolling 3-month basis, current spending has risen steadily from 0.8% (3m yoy) in August 2012 to 5.1% in December. If that trend continues more questions are likely to be asked about the Chancellor’s grip on his spending reduction plans. On the receipts front, overall the figures look to have firmed over the past month, but we are watching closely the income tax revenue numbers as these receipts stood just 2.4% up on the year in December, hardly a rebound from November’s 17% drop and at odds with the apparent resilience of the jobs market. We assume this is a timing issue, but cannot be confident.

UK downgrade shadow looms? Against this backdrop we struggle to see a swing in the public finances such that the monthly outturns start to show smaller borrowing numbers than in the equivalent final quarter in the 2011/12 fiscal year. Hence, factoring in the ‘one-offs’ and with underlying borrowing modestly up on the year, we would expect to see borrowing for the 2012/13 year overall stand close to £90bn. Furthermore, if the Chancellor is to avoid a more severe deterioration, he will be looking, perhaps optimistically, for a return to firmer growth to help shore up his receipts base, in particular. With Budget 2013 now less than two months away (20 March) Mr Osborne may well be scratching around for some more ‘one-offs’, keen to massage the deficit and debt numbers. This is particularly so given the emphasis the ratings agencies have placed on the Budget. Indeed, Fitch recently noted that ‘the risks [of a downgrade] are clearly increasing for the UK and that it would be watching the Budget very closely to see whether forecasts are still consistent with reducing debt. We continue to hold the view that a downgrade to the UK’s triple-A rating, by at least one of the major ratings agencies, will be heading our way before long, albeit with a limited impact on the UK's safe-haven status and on the pound.

The opinions and views expressed are for information purposes only and are subject to change without notice. They should not be viewed as independent research, recommendations or investment advice of any nature.