Today’s public finances update contained a double helping of bad news: borrowing in April / May 2012 (on the PSNB ex definition that excludes the temporary effects of financial interventions, adjusted additionally for the transfer of the Royal Mail pension plan) was £3.9 billion higher than a year before, while there were substantial upward revisions – of £3.2 billion and £3.8 billion respectively – to outturns for 2011-12 and 2010-11.
Incorporating an adjustment for seasonal variation, a six-month moving average of borrowing has risen from £10.0 billion in December to £11.4 billion in May – see chart. A continuation of the latter run-rate would imply a full-year deficit of £137 billion in 2012-13 versus the Office for Budget Responsibility’s March projection of £120 billion.
The OBR is unlikely to attribute an overshoot entirely to cyclical economic weakness, implying that it may revise its assessment that the government is on track to meet the “fiscal mandate” of cyclically-adjusted current budget balance at the end of a rolling five-year period. The supplementary target of reducing the net debt to GDP ratio in 2015-16 is even more vulnerable, since it is fixed in time and achievement depends on the actual rather than “structural” deficit.
The borrowing rise is unlikely to deter the MPC from launching a further programme of gilt purchases next week but opens it to criticism that such action is designed to head off upward pressure on yields as fiscal plans unravel rather than address a genuine shortage of money in the economy.