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UK public coffers get oil boost but outlook grim

LONDON - Bumper tax receipts from North Sea oil companies boosted Britain's public coffers in July but a deteriorating underlying picture left the government little hope of meeting its full-year borrowing forecast.

Although July's surplus was slightly higher than analysts had forecast, government borrowing for the first four months of the financial year was nearly 11 billion pounds ($20.50 billion) higher than the same period last year.

In March, Chancellor of the Exchequer Alistair Darling forecast borrowing of 43 billion pounds for the full financial year. This figure looks increasingly challenging with a slowing economy set to erode tax receipts and increase social security spending.

"The full-year figures are going to be significantly worse than the Chancellor's forecast of 43 billion pounds -- possibly 50 or 60 billion even," said Jonathan Loynes at Capital Economics.

Official data on Wednesday showed the public sector posted a net cash repayment of 12.6 billion pounds last month, higher than the 10 billion pounds forecast by analysts but less than the 13.3 billion pounds repaid in July 2007.

The government's preferred accruals-based measure -- which is less volatile than the cash measure -- showed a surplus of 4.8 billion pounds, slightly higher than the 4.3 billion forecast.

Storm clouds gather

Government borrowing in the first quarter of the financial year was the highest in any quarter since records began in 1946 and analysts said July's surplus did not alter the deteriorating trend.

About 4 billion pounds of July's 9.9 billion pounds of corporation tax was from North Sea companies, more than twice as much as in July 2007. However, corporation tax from onshore companies was lower than last year, suggesting the economic slowdown is starting to take its toll.

January, April, July and October are traditionally surplus months in the public finances calendar due to the timing of tax receipts.

"The surplus is slightly bigger than expected but the key thing is that the deteriorating trend in public borrowing is stark," said Matthew Sharratt, an economist at Bank of America.

Public sector net debt was 37.3 percent of GDP, up from 36.1 percent in July 2007.

A Treasury spokesman said the government was "meeting its strict fiscal rules". However, some economists expect the government to reform its rules in the pre-Budget Report this autumn to allow it to increase borrowing in the near term.

The government's public finances framework revolves around two rules devised by Prime Minister Gordon Brown more than a decade ago when he was finance minister.

The "golden rule" states the government can borrow only to invest over the economic cycle, while the "sustainable investment rule" limits public sector net debt to 40 percent of national income.

A sharp economic slowdown, which looks increasingly likely, would put both rules under pressure. The government's public finance projections were based on forecasts that economic growth would recover to around 2.5 percent in 2009. The consensus among private economists is for growth of just 0.9 percent.

"The public finance figures do nothing to alter the broad concern that the government, on a medium-term view, is suffering considerable fiscal slippage," said Richard Mcguire at RBC Capital Markets.