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Not for the first time, the UK sits somewhere between the US and what we are seeing in Europe as a whole. It has not had the run of positive data-surprises that have been witnessed in the US, but nor has it been beset by the never-ending fiscal woes of the eurozone. The latest borrowing numbers certainly fit into this category. The main (ex-interventions) measure recorded a stronger than expected surplus in January (GBP 10.7bln), a month that is characterised by high level of corporate tax receipts. This element was up 8.6% vs. January of last year, with overall receipts up 5% for central government as a whole in the first 10 months of the financial year.
So, unless there is a marked deterioration in the public finances in the remaining two months of the financial year, the borrowing target forecasts by the Office for Budget Responsibility (OBR) on which the Chancellor has to rely should be met. The real concern however lies with the impact of the current austerity measures on the economy, which naturally have the potential to impact on the borrowing numbers further down the line. Indeed, it was such concerns that under-pinned Moody’s decision last week to put the UK’s AAA rating under review. The real issue is what the Chancellor will do in response. The OBR was already fairly conservative in its view of the economy for this year which, back in Nov 2011, they expected to grow just 0.7%. And the latest survey from the Institute of Directors shows only 35% of members thinking there is a high or very high risk of recession this year. By nature, such people tend to be bullish but, in terms of the outlook for investment and hiring, such views are helpful at the margin. Finance ministers though should be more cautious and circumspect, which is why the UK Chancellor should stick to his guns when he stands up to present his latest budget four weeks tomorrow.
