Saturday, May 22, 2010

U.K. Fiscal Situation Deteriorating Further

The U.K. budget deficit continues to deteriorate, with the deficit increasing from £8.8 billion in April 2009 to £10.0 billion in April 2010.

The numbers are even worse if you consider that tax receipts were boosted by the VAT increase (VAT receipts increased £1.5 billion), and if you consider that the balance was according to the statistics bureau boosted by some one-time items.

Considering that other statistics indicates a recovery (albeit only a weak one) this is somewhat surprising. This suggests that either there were some other temporary factors which worsened the outcome but was unnoticed by the statistics bureau, or that the economic recovery may be illusory.

Particularly if the latter explanation is true, and this implies a continuing deteriorating trend, this makes the pledge by the incoming Conservative-Liberal Democrat government to undertake austerity measures all the more important. And it makes the recent rally in British government bonds somewhat puzzling, except as a vote of confidence in these future unspecified austerity measures (though it should be noted that specified austerity measures in other countries, particularly Greece but also Spain and Portugal has been met with a lot less enthusiasm).