Public sector finances ended the year on a disappointing note. Overall borrowing (PSNB) in December was Stg12.5 billion, well above the market consensus and some Stg3 billion higher than in the same month a year ago. At the same time, borrowing excluding public sector banks (PSNB-X) weighed in at a surprisingly large Stg13.1 billion after a Stg10.3 billion shortfall in December 2013.
However, the headline data were inflated by a Stg2.9 billion payment to the European Commission budget prompted by the upward adjustments made to historical UK GDP announced last year. In addition, both measures of borrowing were revised down by more than Stg1.5 billion in November. In fact, at Stg86.3 billion over the first nine months of the fiscal year, the cumulative PSNB-X was actually Stg0.1 billion below its level during the same period of FY2013/14.
Even so, borrowing has been overshooting its target for much of the year and on current trends the Chancellor will have to make further significant cuts in government spending should the Conservatives be returned to power in May.
In response to the global economic crisis the UK government introduced a number of measures designed to show the underlying state of public sector finances by omitting temporary distortions caused by financial interventions. The government bases its fiscal policy on these measures. To this end, the underlying gauge of government borrowing watched most closely by financial markets is the PSNB-X which takes overall borrowing (PSNB) but excludes public sector banks.
Changes in public sector finances can be used to determine the thrust of the government's fiscal policy. Generally speaking when the government has a rising deficit (or falling surplus) it is loosening its fiscal stance with a view to boosting economic activity. When its deficit is falling (or surplus rising), fiscal policy is being tightened in order to slow economic growth. However, sometimes changes in government financial positions can be due to factors outside of the government's control and do not signal an explicit shift in policy. This means that great care is needed in interpreting the data.
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