By David Robinson and William Wilkes

LONDON (MNI) – September’s data showed a marked improvement in the
public finances but the Office for Budget Responsibility is still likely
to have to raise its borrowing forecasts when it issues its next set of
projections on December 5.

Fears that economic weakness would feed through to a sharp
deterioration in the public finances this fiscal year are not likely to
be realised with the September figures, including back revisions,
showing borrowing running only moderately above year ago levels.

The data, however, still suggest that unless the government were to
announce substantial additional fiscal tightening measures, it will have
to concede defeat on Dec 5 on its supplementary fiscal target of having
public debt as a share of national income falling between 2014-15 and
2015-16.

The headline data from National Statistics Friday showed public
sector net borrowing (PSNBX) came in at stg12.809 billion in September,
some stg0.7 billion lower than in September last year and below the
median forecast in an MNI survey of stg13.5 billion, with the revisions
improving the picture for the fiscal year-to-date.

The OBR’s current forecast, issued back in March, for PSNB-X for
2012-13 was stg119.9 billion excluding the distorting effects of the
transfer of the Royal Mail pension fund into the public sector.

In its analysis following the September data, the OBR noted that
its March forecast “implies a stg1.7 billion decrease (in PSNBX) between
2011-12 and 2012-13. After these revisions to earlier months, (PSNBX
excluding the Royal Mail effect) in the first half of the financial year
is stg2.7 billion higher than last year.”

So half way through the 2012-13 fiscal year underlying PSNBX is
running stg4.4 billion higher than the OBR’s full year forecast.

Ross Walker, economist at RBS, said that an extrapolation of the H1
trends in H2 would show as a stg11 billion overshoot of the OBR’s March
forecast.

That, at least, is a lot better than the stg25 billion overshoot
that was implied by the August public finances data.

Phil Shaw, UK Economist at Investec, also noted that the data show
that any deterioration in the public finances this year may not be as
serious as previously feared.

He said the underlying deficit, for which he excluded the one-off
effect of the Bank of England’s Special Liquidity Scheme as well as the
Royal Mail, was on track to hit stg99 billion compared with the OBR
forecast of stg92 billion, just a stg7 billion overshoot.

The OBR itself was more guarded, noting “there continues to be
significant uncertainty around the prospects for full year borrowing.”

Its detailed comments, however, were compatible with a modest
increase in its borrowing forecasts in December, with corporation tax
running weaker than expected while other receipts are pretty much on
track.

“While it looks likely that corporation tax receipts will fall
short of our March EFO forecast, the other main receipts streams remain
closer to forecast,” the OBR said.

The data, however, are less encouraging for the government on the
debt side. There have been widespread reports that Chancellor of the
Exchequer George Osborne will accept in his December 5 statement that
the supplementary fiscal goal on debt reduction is unachievable.

Osborne had pledged to get public sector net debt on a downpath at
the end of this parliament but at the end of September public sector net
debt excluding the temporary effects of financial interventions (PSNDX)
stood at 67.9% of GDP, up from 63.6% at end September 2011.

Allan Monks, economist at JP Morgan, noted the OBR is likely to
revise down its growth forecasts and “we estimate that the government’s
rule stipulating that the net debt ratio should be falling by 2015/16
will still be missed in the absence of additional measures.”

He believes Osborne’s response will simply be to push back the
target date for debt reduction by a year.

There has, however, been speculation the debt rule could be dropped
and replaced with an alternative target.

-London bureau: 0044 20 7862 7491; email: drobinson@marketnews.com
wwilkes@marketnews.com

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