* Ashley Seager and Angela Balakrishnan
* Guardian Unlimited,
* Thursday December 20 2007
A gloomy Christmas looked in store for Gordon Brown and Alistair Darling after data today showed Britain suffered a record budget deficit last month and the highest ever balance of payments deficit in the third quarter.
The figures, which came on top of poor retail sales figures and a run of weak data on the housing market, suggested that Britain could be in for a prolonged economic slowdown for the first time in more than a decade.
They also appeared to contradict an upbeat assessment of the economy by the prime minister and his chancellor this week when they said that Britain was well placed to weather the global financial instability, despite the Northern Rock crisis.
The Office for National Statistics reported that the public finances suffered a shortfall of spending over receipts of £9.1bn last month on the current budget measure, which excludes investment spending.
That was nearly £2bn worse than last November's figure in spite of strong economic growth over the past 12 months and means that for the first eight months of the year, the government suffered a deficit of £23.1bn. Both the monthly and cumulative figures were the worst since monthly records began in 1993.
On the wider public borrowing (PSNB) measure, there was a shortfall of £11.2bn in November and £36.2bn in the year to date, also record highs. The figures suggest Darling will overshoot his public borrowing forecast of £38bn by about another £5bn.
There was also grim news for Darling as the country suffered a balance of payments shortfall of £20bn in the third quarter of the year, equivalent to 5.7% of national income. Both were records and largely due to a worsening trade gap and a wider deficit in investment income between Britain and other countries.
The goods trade deficit ballooned to £22.6bn in the July to September period, the highest since quarterly records began in 1955, leading to the biggest drag on economic growth recorded since the second quarter of 1995.
The deepening hole in the public finances was due to central government continuing to spend faster than tax revenues which had been hit by falling profits and bonuses in the City of London, a significant generator of income for the Treasury. Independent experts said the public finances were in a bad state considering how strong the economy has been in recent years.
John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, said: "While there is still time for the Treasury to limit the damage by tightening the spending taps in the last four months of the year, much will depend on the tax take in the key month of January. However, the City bonuses and profits that boosted January tax receipts for the last few years may be less healthy in 2008 as the effects of the credit crunch make themselves felt."
Peter Spencer, economic adviser to Ernst & Young's Item Club consultancy, said years of profligacy from the government were taking their toll. "What is really shocking about these figures is that they reveal that the Exchequer was running a large current deficit before the credit crisis hit home, when the economy was doing very well and it should have been showing a large current surplus. Now, the economy is slowing sharply and the public finances will deteriorate equally rapidly."
Conservative shadow treasury minister Philip Hammond, said: "This is Gordon Brown and Alistair Darling's Christmas present to the British economy. They borrowed in a boom, so they've got little room for manoeuvre now things are getting tougher. Borrowing costs money and hard-pressed families will be left to pick up the pieces through more stealth taxes and falling take-home pay."
"This morning's flurry of UK data paints a worrying picture of a dangerously unbalanced economy," said Jonathan Loynes at Capital Economics.
"Overall, a pretty ugly picture, supporting our view that the coming economic slowdown will be a prolonged period of adjustment rather than a short pause for breath like that seen in 2005."
The figures, which came on top of poor retail sales figures and a run of weak data on the housing market, suggested that Britain could be in for a prolonged economic slowdown for the first time in more than a decade.
They also appeared to contradict an upbeat assessment of the economy by the prime minister and his chancellor this week when they said that Britain was well placed to weather the global financial instability, despite the Northern Rock crisis.
The Office for National Statistics reported that the public finances suffered a shortfall of spending over receipts of £9.1bn last month on the current budget measure, which excludes investment spending.
That was nearly £2bn worse than last November's figure in spite of strong economic growth over the past 12 months and means that for the first eight months of the year, the government suffered a deficit of £23.1bn. Both the monthly and cumulative figures were the worst since monthly records began in 1993.
On the wider public borrowing (PSNB) measure, there was a shortfall of £11.2bn in November and £36.2bn in the year to date, also record highs. The figures suggest Darling will overshoot his public borrowing forecast of £38bn by about another £5bn.
There was also grim news for Darling as the country suffered a balance of payments shortfall of £20bn in the third quarter of the year, equivalent to 5.7% of national income. Both were records and largely due to a worsening trade gap and a wider deficit in investment income between Britain and other countries.
The goods trade deficit ballooned to £22.6bn in the July to September period, the highest since quarterly records began in 1955, leading to the biggest drag on economic growth recorded since the second quarter of 1995.
The deepening hole in the public finances was due to central government continuing to spend faster than tax revenues which had been hit by falling profits and bonuses in the City of London, a significant generator of income for the Treasury. Independent experts said the public finances were in a bad state considering how strong the economy has been in recent years.
John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, said: "While there is still time for the Treasury to limit the damage by tightening the spending taps in the last four months of the year, much will depend on the tax take in the key month of January. However, the City bonuses and profits that boosted January tax receipts for the last few years may be less healthy in 2008 as the effects of the credit crunch make themselves felt."
Peter Spencer, economic adviser to Ernst & Young's Item Club consultancy, said years of profligacy from the government were taking their toll. "What is really shocking about these figures is that they reveal that the Exchequer was running a large current deficit before the credit crisis hit home, when the economy was doing very well and it should have been showing a large current surplus. Now, the economy is slowing sharply and the public finances will deteriorate equally rapidly."
Conservative shadow treasury minister Philip Hammond, said: "This is Gordon Brown and Alistair Darling's Christmas present to the British economy. They borrowed in a boom, so they've got little room for manoeuvre now things are getting tougher. Borrowing costs money and hard-pressed families will be left to pick up the pieces through more stealth taxes and falling take-home pay."
"This morning's flurry of UK data paints a worrying picture of a dangerously unbalanced economy," said Jonathan Loynes at Capital Economics.
"Overall, a pretty ugly picture, supporting our view that the coming economic slowdown will be a prolonged period of adjustment rather than a short pause for breath like that seen in 2005."
2pm
* Patrick Collinson
* Guardian Unlimited,
* Thursday December 20 2007
The global credit crunch claimed another victim today as Friends Provident suspended withdrawals from its £1.2bn property fund, prompting fears that billions of pounds held in unit trusts are now under threat.
The insurance group said that investors in the fund, numbering in total 118,000 people, will not be able to access their money for up to six months. It blamed the suspension on a "general sharp decline" in the commercial property market "brought about by the credit crunch".
The fund invests in office blocks and retail developments and usually holds a cash 'buffer' of around 10-15% of total assets to meet demands for withdrawals. But it said this morning that the cash buffer had fallen to 5% following a wave of redemptions, giving the company little choice but to suspend the fund.
Spokesman Jim Murdoch said the only alternative would have been a "firesale" of the fund's property investments which would be against the interests of policyholders.
Fears are now growing of a domino effect among other property funds as investors seek to withdraw their cash. The UK's biggest property fund, run by Norwich Union, revealed last week that its cash buffer has fallen to 7.5% but said this morning that trading is continuing as normal and that it is meeting requests for redemptions.
Around £15bn is invested in property unit trusts, with much of the money pouring in during 2006. Billions more are invested through pension funds held by millions of company employees.
The credit crunch has raised borrowing costs, making many debt-financed property deals no longer attractive. Fears are also growing that financial institutions hit by the credit crunch will axe employee numbers, reducing tenant demand in the crucial City office market in which most of the UK's property funds are invested. A downturn in consumer spending growth is also making retail shopping developments less attractive to investors.
The Financial Services Authority said today that it is closely monitoring the situation. "We are discussing the issue with the industry as a whole and individual funds are also talking to us," said a spokesman.
Friends Provident added: "No one wants to be the first to do this, but we have a duty to look after all of our policyholders and felt that this was the only way forward.
"We are the first, it happens to be us, but this is a problem across the industry ... we are advising financial advisers and benefit consultants and we will be writing to all customers with investments in the property fund."
The insurance group said that investors in the fund, numbering in total 118,000 people, will not be able to access their money for up to six months. It blamed the suspension on a "general sharp decline" in the commercial property market "brought about by the credit crunch".
The fund invests in office blocks and retail developments and usually holds a cash 'buffer' of around 10-15% of total assets to meet demands for withdrawals. But it said this morning that the cash buffer had fallen to 5% following a wave of redemptions, giving the company little choice but to suspend the fund.
Spokesman Jim Murdoch said the only alternative would have been a "firesale" of the fund's property investments which would be against the interests of policyholders.
Fears are now growing of a domino effect among other property funds as investors seek to withdraw their cash. The UK's biggest property fund, run by Norwich Union, revealed last week that its cash buffer has fallen to 7.5% but said this morning that trading is continuing as normal and that it is meeting requests for redemptions.
Around £15bn is invested in property unit trusts, with much of the money pouring in during 2006. Billions more are invested through pension funds held by millions of company employees.
The credit crunch has raised borrowing costs, making many debt-financed property deals no longer attractive. Fears are also growing that financial institutions hit by the credit crunch will axe employee numbers, reducing tenant demand in the crucial City office market in which most of the UK's property funds are invested. A downturn in consumer spending growth is also making retail shopping developments less attractive to investors.
The Financial Services Authority said today that it is closely monitoring the situation. "We are discussing the issue with the industry as a whole and individual funds are also talking to us," said a spokesman.
Friends Provident added: "No one wants to be the first to do this, but we have a duty to look after all of our policyholders and felt that this was the only way forward.
"We are the first, it happens to be us, but this is a problem across the industry ... we are advising financial advisers and benefit consultants and we will be writing to all customers with investments in the property fund."
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