The first month of the new financial year was a stronger than expected one for government finances. Overall borrowing (PSNB) was a slightly lower than anticipated Stg6.0 billion while excluding public sector banks (PSNB-X) the deficit was well below the market consensus at Stg6.8 billion, down from Stg9.3 billon in April 2014.
Strong tax receipts lay behind April's positive outcome and, despite some cooling in overall economic growth, a strong consumer sector should see more of the same over coming months.
Revisions to the back data put the FY2014/15 PSNB-X at a marginally higher Stg87.7 billion. This was still short of the official forecast but at some 4.8 percent of GDP, also uncomfortably large and the main reason for expecting the new Conservative government to adopt a relatively strict fiscal stance this year. Indeed, April's net debt/GDP ratio was unchanged at March's 80.4 percent, the second highest on record behind December's 81.4 percent.
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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