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UK Borrowing Overshoot Underscores Task for New Government

Larry the Cat sits on Downing Street in London, Britain July 19, 2024. REUTERS/Toby Melville
Larry the Cat sits on Downing Street in London, Britain July 19, 2024. REUTERS/Toby Melville
TT
TT

UK Borrowing Overshoot Underscores Task for New Government

Larry the Cat sits on Downing Street in London, Britain July 19, 2024. REUTERS/Toby Melville
Larry the Cat sits on Downing Street in London, Britain July 19, 2024. REUTERS/Toby Melville

Britain's government borrowed a lot more than forecast in June, according to official data published on Friday that highlighted the big budget challenges facing the new government of Prime Minister Keir Starmer.
Public sector net borrowing, excluding state-controlled banks, was a larger-than-expected 14.5 billion pounds ($18.75 billion) last month. A Reuters poll of economists had pointed to an increase of 11.5 billion pounds.
Dennis Tatarkov, Senior Economist at KPMG UK, said the data showed "the daunting task" for the new government to fund its agenda without worsening the public finances.
"A combination of high levels of spending and weak growth prospects will present uncomfortable choices – deciding between even more borrowing or substantially raising taxes if spending levels are to be maintained," he said.
New finance minister Rachel Reeves is likely to announce her first budget after parliament's summer recess. She and Starmer have ruled out increases in the rates of income tax, corporation tax and value-added tax, leaving her little room for maneuver to improve public services and boost investment.
Reeves has ordered an immediate review of the new government's "spending inheritance", a move that lawmakers from the opposition Conservative Party say could presage increases in taxes on capital gains or inheritances.
"Today's figures are a clear reminder that this government has inherited the worst economic circumstances since the Second World War, but we’re wasting no time to fix it," Darren Jones, a deputy Treasury minister, said after the data was published.
Starmer's government says it will speed up Britain's slow-moving economy - and generate more tax revenues - via a combination of pro-growth reforms and a return to political stability that will attract investment.
The borrowing figure for June was 2.9 billion pounds higher than expected by Britain's budget watchdog whose forecasts underpin government tax and spending plans.
In the first three months of the financial year which began in April, borrowing was 3.2 billion pounds higher than projected by the Office for Budget Responsibility at 49.8 billion pounds.
The Office for National Statistics said June's borrowing was the lowest for the month since 2019, helped by a big drop in spending on interest paid on bonds linked to inflation which has slowed sharply.
But the deficit was made bigger by a 1.2 billion-pound fall in social security contributions compared with June 2023. They were cut by former Prime Minister Rishi Sunak before the July 4 election that swept Starmer's Labour Party to power.

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Chinese Officials Expect Bumpy Ride for Economy

A woman holding a Chinese flag walks along a street in Beijing, China, 19 July 2024. EPA/ANDRES MARTINEZ CASARES
A woman holding a Chinese flag walks along a street in Beijing, China, 19 July 2024. EPA/ANDRES MARTINEZ CASARES
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Chinese Officials Expect Bumpy Ride for Economy

A woman holding a Chinese flag walks along a street in Beijing, China, 19 July 2024. EPA/ANDRES MARTINEZ CASARES
A woman holding a Chinese flag walks along a street in Beijing, China, 19 July 2024. EPA/ANDRES MARTINEZ CASARES

Chinese officials acknowledged on Friday the sweeping list of economic goals re-emphasised at the end of a key Communist Party meeting this week contained "many complex contradictions," pointing to a bumpy road ahead for policy implementation.
Pressure for deep changes in how the world's second-largest economy functions has risen this year, with consumer and business sentiment near record lows domestically, and global leaders increasingly concerned with China's export dominance, Reuters reported.
Following a four-day, closed-doors meeting led by President Xi Jinping, which takes place once in roughly five years, officials made a raft of seemingly contradictory pledges, from modernizing the industrial complex while also expanding domestic demand to stimulating growth and simultaneously curbing debt risks.
The initial summary of the meeting, known as plenum, did not contain details on how Beijing plans to resolve the tensions between policy goals, such as how to get consumers to spend more while resources flow primarily to producers and infrastructure.
Concerns are growing that without a structural shift that gives consumers a greater role in the economy, debt will continue to outpace growth in order to finance Beijing's industrial modernization and global prominence goals.
That raises the stakes. Some analysts warn the current path fuels risks of a prolonged period of near-stagnation and persistent deflation threats as seen in Japan since the 1990s.
"High debt levels plus increasing deflationary pressures eventually could result in a Japan-style ... low growth and very low inflation," said Julian Evans-Pritchard, head of China economics at Capital Economics.
"That, I think, would force them to change course on their current policies. But that might not happen straight away. That might only happen in a few years’ time."
Contradictions in Chinese policy efforts have been present for decades, as were goals to increase manufacturing value added, enhance social security, liberalize land use and improve local government tax revenues.
But making tough choices is an increasingly urgent task. China grew at a slower than expected pace in the second quarter, leaning hard on industrial output and external demand, but showing persistent domestic weakness.
Speaking at a media briefing on Friday along with other Party officials, Tang Fangyu, deputy director of the central committee's policy research office, acknowledged the challenges.
"The deeper the reform goes, the more complex and acute the conflicts of interest it touches," Tang said.
"Pushing forward Chinese-style modernization faces many complex conflicts and problems, and we must overcome multiple difficulties and obstructions."
The European Union Chamber of Commerce in China said it was "positive that China’s leadership has again acknowledged many of the headwinds facing the country’s economy," but noted the outcome was largely "a reiteration of points."
"There appears to be no deviation from (China's) immediate priority, which is to balance its economic recovery against national security concerns, while maintaining social stability."

China is expected to publish a document with more detailed policy plans in the coming days.
But the fact that the initial post-plenum announcement borrowed heavily from China's existing playbook disappointed some economists.
“Nothing new under the sun: the same industrial policies, the same sense of things," said Alicia Garcia Herrero, chief economist Asia-Pacific at Natixis.
"Really no change in direction, no consumption-led growth, nothing. No sentence on the power of market forces, nothing. So, it’s really disappointing.”
Chinese stocks, not far above the five-year lows hit at the start of 2024, were flat on Friday, suggesting the plenum did little to improve sentiment.