Thursday, February 18, 2010

U.K. Posts First January Deficit

Traditionally, the British government has a large surplus in its finances in January as January is the time when corporations make a large part of their tax payments. In January this year the surplus was only £1.2 billion, down from £10.2 billion, reflecting both a big drop (7.6%) in revenues and a big increase (9.8%) in spending. If you take the high inflation rate into account, the drop in government revenues were even greater while the increase in spending was smaller.

And it is even worse if you use the normal accounting principles for government finances. The U.K. government has the unusual principle of not counting spending it calls investments as spending, despite the fact that these "investments" do not generate any visible return for the government. If you had also included borrowing for "net investments" (which most government accounts do), then the surplus of £5.3 billion in January 2009 swung to a deficit of £4.3 billion.

For the first 10 months of the fiscal year, the official deficit rose from £36 billion to £90.7 billion, while the deficit using normal accounting methods rose from £58.4 billion to £122.4 billion.

While government revenue is partly a lagging indicator, the fact that it keeps falling is clearly a sign that the recovery is very weak at best, something that is confirmed by other indicators as well (see here and here).

UPDATE: A British reader has sent in a clarification, pointing out that not all British companies sends in their taxes in January. This depends on what corporate fiscal years they have, something which British companies can freely choose. However, most companies choose the calendar years as their fiscal years, explaining the above mentioned calendar effect.