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Budget deficit: What the economists say

Guardian Economics 21st July 2009

Total government spending in June hit £49bn, up from £44.2bn a year earlier, so what do the experts think?

Howard Archer, chief UK economist at IHS Global Insight

In some respects, the June public finance data provided some relief for the chancellor as they were not quite as dreadful as feared. Even so, it is hard to gain much comfort from a public sector net borrowing requirement of £13bn in June and a central budget deficit of £9.9bn.

These were both the largest June shortfalls since the monthly series for each figure began in 1993 and 1988 respectively. Consequently, the current budget deficit almost doubled year-on-year to £34.1bn in the first three months of fiscal 2009-10, as did the PSNBR to £41.2bn.

Once again tax revenues were hit very hard by contracting economic activity, deteriorating corporate profitability, elevated and rising unemployment, markedly reduced bonus payments, last December's VAT cut, and still-muted housing market activity and prices. For example, VAT receipts were down by 18.1% year-on-year in June. However, receipts from income and capital gains tax were somewhat surprisingly only down by 3% year-on-year in June. Meanwhile, markedly higher unemployment is also resulting in increased benefit claims, thereby pushing up government expenditure.

David Kern, chief economist at the British Chambers of Commerce (BCC)

Although slightly smaller than feared, these figures confirm the grim state of our public finances. We are still heading towards a deficit of £175bn this financial year, in line with the chancellor's forecast.

It would be wrong to tighten policy while the recession continues, but maintaining Britain's international credibility requires a robust plan for restoring our public finances over the medium-term. This must focus on curtailing public spending across the board, while avoiding damaging measures that would harm wealth-creating businesses.

Richard McGuire, fixed income strategist at RBC Capital Markets

Better than expected but still clearly indicative of considerable slippage. From a curve perspective, the poor fiscal backdrop represents something of a time bomb which stands to prompt a marked bear steepening once the market senses a sustainable recovery to be under way. These data are not the trigger but they do little to disguise the ticking.

Colin Ellis, European economist at Daiwa Securities SMBC

With many people already looking forward to the Q209 GDP number at the end of this week, today's public finance data may have been preemptively dismissed as more of the same old bad news. But the data actually surprised on the upside, for once – net borrowing came in at £13bn in June, lower than expectations of £15.5bn, and at £19bn the net cash requirement was also not quite as big as had been expected. While central government receipts were down 5.7% year on year in June, that fall was less marked than the 11.1% year on year decline in May – which could be taken by optimists as a first sign that the pace of decline in receipts may be starting to ease. But with social spending set to soar as unemployment continues to rise, the aggregate deficit is not likely to improve much any time soon.

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