Chancellor needs to be careful not to jeopardise the recovery

By Trevor Williams, Chief Economist, Corporate Markets

News that the UK government ran a budget deficit of £4.3bn last month has underscored concerns about the UK’s public finances. The fact that the deficit occurred in a month when inflows of tax receipts are at their peak is highly unusual. Indeed, it is the first time January has posted a deficit since the government starting compiling figures on a monthly basis in 1993.

The latest deterioration brings the cumulative budget deficit in the current fiscal year to £122bn, compared with £58bn over the same period in FY2008-09. Although a marked deterioration, the Treasury nevertheless remains on course to meet, if not slightly undershoot, its revised full-year public sector net borrowing (PSNB) projection of £178bn made in the Pre-Budget Report.

In this regard, the government has been aided by the stronger-than-expected recovery in asset
prices (both housing and equities). The magnitude of the deficit, however, has led to calls for the Chancellor to go much further in tightening fiscal policy in the upcoming 2010 Budget. These calls have become more
pressing in light of the difficulties some of the peripheral highly-indebted eurozone countries, notably Greece, have faced in recent weeks.

Nevertheless, as others have argued, a further aggressive policy tightening at this stage of the economic cycle could imperil the nascent economic recovery.

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* All charts are sourced to Lloyds TSB Corporate Markets Economic Research, Bloomberg, IMF and Datastream

 


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