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Public finances: what the economists say

Guardian Economics 20th August 2009

'The necessary fiscal consolidation is going to be a huge constraint on the economic recovery'

Vicky Redwood, UK economist at Capital Economics

"UK retail sales posted another decent rise in July but the dire public finance figures - which underline the need for tax rises/spending cuts – suggest that this resilience will eventually fade.

"Public sector net borrowing was £8bn in July – in contrast to the surplus usually recorded at this time of year. The necessary fiscal consolidation is going to be a huge constraint on the economic recovery."

Richard Snook, senior economist at the CEBR

"The latest official data released this morning showed a further worsening of the United Kingdom public finances in July. Public sector net borrowing was £8.0bn in July compared with a surplus of £5.2bn in the same month a year earlier. The £13.2bn deterioration since last year is more than twice that forecast by economists last week.

"Cumulative borrowing from April to July 2009 has reached £49.8bn, more than three times the comparable figure last year which saw £15.9bn borrowed by July. The figures show that over the financial year to date, tax revenues are down by 11.9% from last year; on the other hand benefit and social expenditure has soared by 9.5%.

"Today's figures add to the plethora of bleak news for public sector finances. Borrowing for this financial year is likely to come close to £200bn – giving whichever government takes power in 2010 a once-in-a-generation challenge to bring the debt and deficit back down to manageable levels."

Colin Ellis, European economist at Daiwa Securities SMBC

"One point of particular concern was the renewed sharp decline in revenues - proceeds from income and wealth taxes were down a whopping 22.4%Y/Y in July - and, while we would caution against putting too much weight on any one month's data, these gloomy figures confirm that the public finances are in a dire state.

"The authorities must be hoping that QE starts working soon, as the only extra support that is at all likely from fiscal policy over the next year is probably an extension of the VAT cut and/or the modest car scrappage scheme. But given the underlying weaknesses that are evident into today's data, if the economy remains weak then the toll on the public sector finances could end up being truly horrible."

Liberal Democrat Treasury spokesman, Vince Cable

"As the country fights its way through recession we are seeing a collapse in tax revenues.

"We are now heading for a level of deficit this year even higher than the Chancellor's original predictions.

"What is particularly concerning is that the Government's hopes for the recovery of the public finances are based on extremely optimistic growth forecasts. Without this growth we will be heading for even higher levels of debt."

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

"The further improvement in retail sales confirms our assessment that the recession is ending. However, any recovery is likely to be weak and fragile.

"The worse than expected public sector deficit emphasises the huge scale of adjustment that the UK is facing over the next few years. While it is impossible for the government to properly tighten spending when the economy is weak and unemployment soars, a clear medium-term plan must be formulated to illustrate how the public finances will be returned to health."

Hetal Mehta, Senior Economic Advisor to the Ernst & Young Item Club

"July is an important month for corporation tax receipts so usually yields a surplus. The first July deficit on record reflects both the poor state of the public finances prior to the downturn and the damage being wreaked by the recession, both in terms of depressing tax revenues and pushing up spending. Central government receipts were down 15.3% from last year, with separate HM Revenue and Customs data showing a 38% drop in corporation tax revenues from July last year. Meanwhile current expenditure was up 7.5% while the current budget balance has moved from a £7.8bn surplus in July last year to a deficit of £5.1bn.

"Public Sector Net Borrowing jumped from -£5.2bn a year ago to £8.0bn last month – the first time this has been positive in the month of July since 1996.

"At present it looks like borrowing in this financial year will not be too far from the Treasury's projections. It is a couple of years down the line, when the government plans to tighten fiscal policy, where we believe their forecasts are far too optimistic and a much more significant tightening of policy will be needed than that which is currently planned."

David Page at Investec Securities

"July's PSNB deficit far worse than expected. July's public sector deficit posted a sharp widening to £8.0bn, the worst July deficit on record (going back to 1993) and the first deficit recorded in this month since 1996. To be fair, market expectations were wide of the mark expecting a deficit of just £0.6bn, but today's release was worse than our own forecast of £4.9bn.

"The deterioration this month is much to do with the reason that July usually records a surplus: the first months of the quarter are usually associated with large corporate tax inflows, but these have been amongst the worst hit by the current recession. Corporation taxes were down 38% on the year this July – some £3bn. Central government receipts slowed to -15.3% on the year and -12% for the year so far. Spending growth has risen by 6.2% on the financial year so far.

"PSNB deficit still likely around Budget forecast."

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