Pounds 4bn jump in PSBR rings deficit alarms

THE PUBLIC sector borrowing requirement widened by a worse than expected pounds 4bn in September, bringing the budget deficit in the first six months of the fiscal year to pounds 18.4bn.

The figures were greeted with dismay by the City, which worried that its forecast of a full-year deficit of pounds 33bn might now prove too optimistic. The deficit for the first six months is almost double the shortfall recorded in the same period a year earlier.

In the March Budget, the Government forecast a deficit of pounds 28bn for 1992/3. But it is expected to increase this estimate significantly in the Autumn Statement next month.

Neil MacKinnon, economist at Citibank, said he feared the PSBR would total pounds 35bn this financial year, rising to pounds 50bn in 1993/4. With the rising PSBR tying the Government's hands on the public spending total, he said that policy should aim to change the mix of spending, focusing resources on capital projects and those which boost employment.

Robert Lind, at UBS Phillips & Drew, said the 'explosive path of government borrowing (was) unsustainable in the medium term, and will necessitate some dramatic fiscal tightening'.

The deterioration of the PSBR in September, traditionally a high borrowing month, was about pounds 1bn more than was predicted in the City. It reflected, almost entirely, a sharp rise in spending and only a small increase in total receipts, both apparently due to the impact of recession.

Total cash outlays for September were pounds 19.52bn, up from pounds 17.94bn. In the first six months of the fiscal year, they jumped by 8.5 per cent to pounds 114.3bn. Overall cash receipts were pounds 15.1bn in September, up slightly from pounds 14.76bn a year earlier. But in the six months to September, receipts fell 0.5 per cent to pounds 94.8bn after higher indirect tax receipts were offset by a fall in income taxes.

Excluding privatisation receipts, the PSBR was pounds 23.4bn in the first six months, up sharply from pounds 14.4bn in the comparable six-month period.

The figures suggest that the underlying budget deficit is now running at around pounds 40bn, but official borrowing from abroad and intervention on the foreign exchange markets last month have allayed concerns over potential government difficulties in financing the deficit this fiscal year. However, City analysts expressed concern that the Government could run into problems in 1993/4.

Michael Hughes, chief economist of Barclays De Zoete Wedd, said: 'Next year there will be funding difficulties: pounds 40bn is greater than the entire cash flow of UK institutions.' Nigel Richardson, economist at Warburg Securities, said: 'The deterioration in the deficit is coming faster than expected.'

The attention of the financial markets was diverted from the PSBR figures by the 1-point cut in base rates to 8 per cent. The pound fell on the news, but, after 'wobbling' for a short while, stabilised to end the day 1.82 pfennigs lower at DM2.4470.

David Cocker, analyst at Chemical Bank, said the pound survived relatively unscathed because the boost to economic recovery was seen as good for the currency. But he warned that the markets remained nervous that the Government's economic policy was being led by events rather than demonstrating leadership.

Speculation that interest rates could be cut in Germany and elsewhere in Europe boosted the dollar, which gained 2 pfennigs to close at DM1.4730. The pound fell by 3.7 cents to dollars 1.6595, while against a basket of other currencies sterling fell by 1.1 points to 80.7 per cent of its 1985 value.

The stock market reacted favourably to the rate cut, with the FT-SE index of 100 leading company shares gaining 41.4 points at one stage. But a weak performance on Wall Street took off some of the gloss during the afternoon. The FT-SE index closed 17.3 points up on the day at 2,563.9.

Gilts also took their cue from interest rates rather than the borrowing figures and ended up to pounds 1.50 higher.