UK public sector net borrowing excluding the temporary effects of financial interventions (PSNB ex) remains on course to hit or undershoot the OBR’s November 2011 forecast of £127 billion (revised up from £122 billion in March) despite economic weakness.

December borrowing of £13.7 billion was down from £15.9 billion a year before and £1.2 billion below the consensus forecast, according to Reuters. There was, however, an upward revision of £1.3 billion to prior months in 2011-12.

PSNB ex was £124.8 billion in calendar 2011, implying that borrowing in the first quarter of 2012 must exceed the level a year earlier for the OBR forecast for 2011-12 not to be undershot.

PSNB ex was 8.3% of GDP in calendar 2011 versus an OBR forecast of 8.4% for 2011-12.

The view here remains that the fiscal position is better than implied by the PSNB ex measure since financial interventions are now generating a sizeable surplus, not all of which should be discounted – see previous post for more discussion. Total borrowing (i.e. net of this surplus) was £91.3 billion (6.0% of GDP) in calendar 2011, down from £122.5 billion in 2010 – an impressive 25% reduction.

Of the £33.5 billion positive impact of financial interventions last year, £19.6 billion represented the operating surplus of the public sector banks with a further £8.1 billion due to Bank of England net interest income from the Asset Purchase Facility (APF) and fees from the Special Liquidity Scheme (probably small). (The remaining £5.8 billion includes the surplus of the banks’ subsidiaries.) There is a strong case for the Treasury booking the Bank's net income from QE rather than allowing it to accumulate off-balance-sheet in the APF. This could be achieved by the APF paying the Treasury an annual dividend. Such a treatment would be equivalent to that adopted in the US, where the profit of the Federal Reserve, including its net income from QE, is distributed to the Treasury. The Fed has estimated that the distribution relating to 2011 will be $76.9 billion, up from $31.7 billion in 2008, with the increase mainly reflecting the expansion of its balance sheet due to asset purchases.