Public sector finances were in a slightly better state than expected in May. At Stg9.35 billion overall borrowing (PSNB), saw a sharp improvement on the Stg11.70 billion posted in May 2014 while, excluding public sector banks (PSNB-X), the deficit stood at Stg10.13 billion, down more than Stg2 billion from a year ago. Additionally, the April shortfalls were also revised smaller and now stand at Stg5.46 billion and Stg6.24 billion respectively.
The annual reduction in the PSNB-X was largely attributable to a Stg1.6 billion decline in central government net borrowing, itself reflecting a 5.6 percent rise in VAT receipts and a 5.3 percent gain in income tax inflows. Central government expenditure was essentially flat over the period.
Despite May's relatively positive results, at 80.8 percent the ratio of net debt to GDP was still up 0.4 percentage points versus its April reading, 1.4 percentage points above its mark a year ago and at its second highest level on record. As such today's data will leave fiscal policy focused on further austerity measures in FY2015/16 which, in itself, should be seen as reducing any pressure on the BoE MPC to tighten this year.
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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