GB: Public Sector Finances

Tue Jan 23 03:30:00 CST 2018

Consensus Actual Previous Revised
PSNB Stg4.4billion Stg0.98billion Stg8.12billion Stg6.65billion
PSNB-X Stg5.0billion Stg2.59billion Stg8.69billion Stg8.26billion

Public sector finances were in significantly better shape than expected in December. Total net borrowing (PSNB) stood at just Stg0.98 billion, well below market forecasts and down from Stg4.48 billion a year ago. More importantly, excluding public sector banks (PSNB-X), the deficit was only Stg2.59 billion, or about half of its December 2016 outturn. This was its lowest reading for the month since 2000. In addition, both measures of borrowing in November were also revised down.

Compared with a year ago, last month was flattered by a Stg1.2 billion reduction in the government's net contribution to the EU. This can be very erratic but even allowing for this, the data are surprisingly good. Record VAT receipts, up 4.9 percent versus December 2016, did much to curb the red ink.

At Stg50.0 billion, the PSNB-X over the first nine months of the fiscal year was more than 11 percent below its level over the same period in FY2016/17. The Office for Budget Responsibility (OBR) forecast underlying borrowing for the full-fiscal year at Stg49.9 billion. If January can produce its usual hefty seasonal financial surplus, this now looks readily attainable although much will depend upon how the economy performs. In any event, the cushion against unwelcome Brexit developments is now looking a little more supportive.

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.