Following a seasonally strong (albeit weaker revised) July, public sector finances fell back into the red in August. Overall borrowing (PSNB) was a much larger than expected Stg11.3 billion, up from Stg9.9 billion a year ago. More significantly, excluding public sector banks, the shortfall was some Stg12.1 billion or 12.6 percent above its August 2014 print and a 3-year high.
However, as is often the case with the monthly borrowing figures, August's disappointing performance was at least in part a function of timing issues, in this instance concerning self-assessment tax receipts. These slumped to a record low last month but only after an unusually strong July. In fact, taking the two months together the inflows saw a new high, consistent with an expanding economy that is now approaching full employment.
The bigger picture also shows a trend improvement in the underlying position. Hence, the cumulative PSNB-X since the start of the fiscal year was Stg38.4 billion, down a tidy Stg4.4 billion from the same period in FY2014/15. Even so, pressure on the government to get its fiscal house in order remains considerable as the ratio of public sector net debt (excluding banks) to nominal GDP weighed in at 80.6 percent, nearly a full percentage point above its level a year ago. To this end fiscal policy should continue to have a negative impact on economic growth for some while yet.
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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