Tuesday February 19, 11:18 AM
FOCUS Darling counting on tomorrow's public finance news for budget flexibility
LONDON (Thomson Financial) - Chancellor of the Exchequer Alistair Darling will be crossing his fingers that tomorrow's public finance data for January will give him some room to loosen fiscal policy in his first Budget on March 12.
With borrowing so far this fiscal year way above forecast and the inclusion of Northern Rock (LSE: NRK.L - news) 's liabilities set to breach one of the government's self-imposed fiscal rules, Darling will be hoping tomorrow's data will ease the pressures, both economic and political, on him.
'The degree of manoeuvre is highly debatable though he would like to cut taxes,' said Neil Mackinnnon, chief economist at ECU Group.
City commentators are not that confident tomorrow's January data will give him much more wriggle room.
January is an important month for government receipts, with a large number of corporate and income tax payments coming in, but the economic slowdown is expected to have put a dent in the surplus last month.
'With slower economic growth set to hit tax revenue projections, whilst spending looks set to rise due to automatic stabilisers, there is little that the Chancellor can offer to help stimulate activity in the upcoming budget,' said James Knightley, UK economist at ING Barings.
Analysts polled by Thomson Financial News expect public sector net borrowing, the government's preferred measure, to be -10.0 bln stg against -10.6 bln stg in January 2007.
That monthly surplus will help the overall state of the public finances but will do little to bring the fiscal deficit over the year back in line with Darling's forecast last October.
In the fiscal year to date from April to December, public sector net borrowing stood at 43.6 bln stg, way up on the 32.3 bln recorded over the same period last year. In his pre-budget report (PBR) in October, Darling estimated that the deficit this fiscal year would be 38.0 bln stg.
As a result, to meet his forecast, the government will have to enjoy a bumper January when corporation tax payments and self-assessment receipts coincide.
David Page, economist at Investec Securities, said the 'patient is not in great health' and that the full-year PSNB could be 42 bln stg, or around 3 pct of GDP.
He said the real concern is that the public finances, particularly on the current budget measure, which strips out investment, have got so bad at a time when growth has been above trend at around 3 pct.
Stripping out investment, the government's current budget was in deficit to the tune of 28.1 bln stg, up on the 18.4 bln recorded in the same period last year.
The current budget is used in calculating the so-called 'golden rule' of balancing the budget, excluding investment, across the economic cycle.
According to Darling, the current budget is seen at 8.3 bln stg in 2007/08.
Investec (LSE: INVP.L - news) 's Page reckons that deficit could be 15 bln stg.
It's not just on the borrowing front that Darling faces difficulties as the government is set to breach its debt threshold following the nationalisation of Northern Rock.
Net debt at the end of December stood at 536.5 bln stg, or 37.7 pct of GDP.
The government's second fiscal rule, the sustainable investment rule, requires net debt to be below 40 pct of GDP over the economic cycle.
George Buckley, chief UK economist at Deutsche Bank (Xetra: 514000 - news) , reckons that the inclusion of Northern Rock's into the government's balance sheet may lead to Darling revising the debt rules in the upcoming budget.
'Perhaps the (debt) limit will be raised to accommodate Northern Rock's debt, or otherwise the level of debt will be evaluated on the existing 40 pct rule 'ex-Northern Rock','
Others are urging Darling to scrap both rules.
The National Institute of Economic and Social Research (NIESR) for one reckons Darling should introduce a new single target for the public finances, which would be assessed by a body independent of the Treasury.
'He should scrap the rules and replace them with a new target that is designed to be more flexible,' said Martin Weale, NIESR's director.
'What we have at the moment hasn't worked,' he added.
The rules, introduced by then Chancellor Gordon Brown in 1997 when Labour came to power, are supposed to be rigid and enforceable, but Weale thinks they are vague and prone to be distorted.
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