For once public sector finances were in rather better shape than expected in January. In a seasonally buoyant period for tax receipts overall borrowing (PSNB) recorded a Stg9.4 billion surplus while excluding public sector banks (PSNB-X) the black ink stood at Stg8.8 billion, comfortably above market expectations. Moreover, the good news for January followed sharply smaller revised deficits on both measures in December.
The surplus on the January PSNB-X was up Stg2.3 billion versus a year ago and, cumulatively over the financial year to date, the deficit was Stg74.0 billion, down Stg6.0 billion from the same period of FY13/14. The unexpected improvement was attributable to an overdue pick-up in tax receipts which in recent months have been disappointing soft in the face of a still robustly expanding economy.
Nonetheless, on current trends the government has a lot of work to do to reach its medium-tern fiscal goals and should the Conservatives be returned to power in May, fiscal policy stands to be tightened significantly further.
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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