Public sector finances were in a markedly less healthy state than expected in October. Total net borrowing (PSNB) weighed in at Stg7.47 billion, up from Stg6.32 billion a year ago, while excluding public sector banks (PSNB-X) the shortfall was Stg8.25 billion, a rise of more than 16 percent versus October 2014.
The increase left the PSNB-X at its highest October level since 2009 and will fuel doubts about the government meeting its full-year borrowing objective (stg69.5 billion). Cumulatively so far this financial year underlying borrowing (Stg54.3 billion) is running a respectable 10.9 percent below its comparable year ago level but this is still well short of the 30 percent reduction targeted by the government. Moreover, the net debt/GDP ratio stood at 80.5 percent, a 1.1 percentage point increase from last year.
Versus target, the October borrowing undershoot essentially reflected excess government spending which climbed 3.3 percent from October 2014 on the back of higher departmental outlays. This is likely to remain a problem area going forward with additional funds almost certainly earmarked for the intelligence and policing services in the wake of the Paris terrorist attacks.
That said, assuming that the domestic economy lives up to expectations, underlying public sector borrowing should still fall significantly this year. Meeting current targets will not be easy but with inflation likely to remain very low and interest rates probably on hold through possibly much of 2016, the gilt market is unlikely to be troubled by supply.
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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