Public sector finances were much as expected in December. At Stg6.42 billion, overall net borrowing (PSNB) was down from Stg6.73 billion a year ago, while, excluding public sector banks, the shortfall was Stg6.86 billion, a 5.0 percent decline from December 2015.
Monthly borrowing data are notoriously erratic but the government should not be too displeased by the cumulative year to date PSNB-X which, at Stg63.8 billion, was some 14.3 percent below its level in the same period in FY2015/16 and at its lowest mark since the start of the global crisis.
Even so, it was not all goods news as the net debt/GDP ratio climbed from 84.6 percent in November to 86.2 percent, a record high for the current series.
The public sector net borrowing requirement (PSNB) is the difference between the sector's receipts and expenditure and so provides a simple measure of government fiscal policy. In response to the global economic crisis in 2008/09 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. It 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 net 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.