Public sector finances were in a worse state than expected in November. At Stg13.56 billion overall borrowing (PSNB) was up nearly Stg1.5 billion from a year ago and well above market expectations. More significantly, adjusted to exclude public sector banks (PSNB-X), the shortfall was some £14.16 billion compared with Stg12.86 billion in November 2014. This also comfortably exceeded the market consensus.
Treasury inflows in November last year were boosted around Stg1.1 billion by one-off payments associated with fines paid by financial companies so the true underlying deterioration is not as marked as first appearances suggest. Even so, the jump in borrowing is disappointing and will raise fresh doubts about the prospects of meeting the (recently upwardly revised) FY2015/16 PSNB-X target of Stg68.9 billion.
There was also bad news on net debt which, excluding public sector banks, rose as a proportion of GDP from 79.7 percent in November 2014 and 80.2 percent in October to 80.5 percent, matching its highest point since December 2014.
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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