Public sector finances were a good deal better off than expected last month. At Stg6.2 billion, total borrowing (PSNB) was well below the Stg9.7 billion outturn in the same month in 2014 and comfortably short of market forecasts. More importantly, excluding public sector banks (PSNB-X) the deficit was also down sharply. At Stg6.9 billion the shortfall here was Stg3.5 billion less than a year ago and similarly markedly smaller than generally anticipated.
The new figures put the PSNB over the first eleven months of the fiscal year at Stg74.6 billion and the cumulative PSNB-X at Stg81.8 billion, a decrease of Stg8.8 billion from the same period in FY2013/14. In the absence of a surprisingly large deficit this month underlying borrowing for the full year should come in beneath the Office for Budget Responsibility's (OBR) newly downwardly revised Stg90.2 billion forecast.
February's surprisingly good news was attributable to a bounce in revenues led by a jump in income tax receipts to a new record high. Given the buoyancy of the economy, these have been relatively sluggish for much of the year and, irrespective of some timing issues over payments, were probably overdue a recovery.
The government should be quite happy with today's fiscal update although, as Wednesday's Budget made clear, this will still not preclude significant fiscal tightening in the year ahead.
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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