Credit Herald

Britain had the biggest budget deficit for any September since records began in 1993 as the recession ravaged tax revenue and drove up welfare costs.

The 14.8 billion-pound ($24.3 billion) shortfall compared with a deficit of 8.7 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 17 forecasts in a Bloomberg News survey was 15.5 billion pounds.

With a general election due by June, Prime Minister Gordon Brown and opposition leader David Cameron are vying to show their determination to reduce borrowing without hitting frontline services. Whoever takes office, Britain faces tax increases and the deepest spending cuts since the country sought an International Monetary Fund bailout in 1976, analysts say.

“Today’s statistics only confirm what a sorry state the public finances are in,” said Hetal Mehta, senior economic adviser to Ernst & Young LLP’s Item Club. “There is no doubt that fiscal policy will be tightened after the election regardless of which party forms the next government. The measures announced so far provide a fraction of the extra income needed to close the government deficit.”

A cash method of accounting, known as the public sector net cash requirement, showed the deficit widened to 19.4 billion pounds in September, the largest shortfall for the month since records started in 1984, the statistics office said. Economists predicted a 19 billion-pound deficit. A 5.9 billion-pound interest payment was the biggest on record.

Record Borrowing

In April, the Treasury forecast net borrowing of 175 billion pounds in the year through March 2010, or 12.4 percent of gross domestic product. In the first six months, the shortfall was 77.3 billion pounds compared with 33.8 billion pounds a year earlier. That’s the largest half-year deficit since records began in 1946.

Government receipts dropped 6.3 percent in September from a year earlier. Taxes from corporate profits fell 27 percent, value-added tax declined 0.5 percent and income tax dropped 5.6 percent, the statistics office said.

Spending rose 5 percent, with net spending on social benefits increasing 9.7 percent as unemployment climbed. Net investment tripled to 3.5 billion pounds as the government brought forward projects to help the economy.

With the ruling Labour Party trailing the Conservatives in opinion polls, the dispute over how to tackle the deficit is set to dominate the next election.

Conservative Plans

Cameron says Britain risks losing the confidence of investors unless faster action is taken to bring down debt. Gambling that voters will reward their candor, the Conservatives this month promised to cut spending by 7 billion pounds a year by increasing the retirement age earlier than planned and freezing the wages of all except the lowest-paid state workers.

“These record borrowing figures underline the extent of Labour’s debt crisis,” Philip Hammond, who speaks on Treasury affairs for the Conservatives, said in a statement. “A responsible government would act immediately to start reducing public spending and bring Britain’s deficit down. Failure to act will risk interest rate rises, causing the recovery to falter and putting jobs at risk.”

Brown says the Conservative plans would snuff out the nascent economic recovery, arguing the burden of deficit- reduction should fall on the rich, partly through higher taxes.

Treasury’s View

“Today’s figures are broadly in line with our forecast and reflect our action to lock in the recovery and get the economy growing again by the turn of the year,” Liam Byrne, chief secretary to the Treasury, said in a statement. “What is clear is that turning off government support now would not help Britain. It would simply wreck the recovery.”

Brendan Barber, general secretary of the 7 million-member Trades Union Congress, said Conservative calls for “immediate deep spending cuts and public sector pay freezes would push the U.K. economy into a double-quick double-dip recession just when the rest of the world is recovering.”

Including the liabilities of banks now controlled by the government, such as Bradford & Bingley Plc and Northern Rock Plc, Britain had 824.8 billion pounds of debt in September, or 59 percent of GDP, the statistics office said. That’s the biggest debt burden since at least 1974.

Excluding financial-sector interventions, debt climbed to 682.8 billion pounds in the third quarter, or 48.9 percent of GDP, the report showed.

Credit Rating

Standard & Poor’s said in May that Britain may lose its AAA credit rating after predicting debt may reach 100 percent of GDP by 2013, more than the 79 percent forecast by the Treasury.

The prospect of tax increases and spending cuts may weigh on the recovery, meaning the deficit may be even higher than the government predicts over the next four years, according to the Item Club, which uses the same forecasting model as the Treasury.

The fiscal tightening begins in January when a temporary cut in value-added tax expires, and from April Brown plans to tax incomes above 150,000 pounds at 50 percent instead of the current 40 percent. Social security taxes are scheduled to rise from April 2011.

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