Public sector finances were much as expected in March. At Stg6.7 billion overall borrowing (PSNB) was up from a smaller revised Stg4.8 billion in February but down from Stg7.2 billion a year ago. Excluding public sector banks (PSNB-X) the deficit was Stg7.4 billion compared with a Stg5.5 billion shortfall in mid-quarter and Stg7.8 billion of red ink in March 2014.
The latest data put the financial year PSNB-X at Stg87.3 billion, a fall of Stg11.1 billion versus FY2013/14 and nearly Stg3 billion short of the Office of Budget Responsibility's recent stg90.2 billion forecast. Moreover, the positive headline news for the bond market has been compounded by an announcement from the Debt Management Office (DMO) that, as a result of the undershoot, this year's gilt auction sales will be cut by Stg2.5 billion to Stg130.9 billion.
The financial year outturn will also go down very well in government circles as proof of its commitment to balance the UK's financial books over the longerterm. More importantly with a general election just a few weeks away, it may also be a small plus for the Conservatives in the opinion polls.
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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