UK Tallies Deficit on Low Tax Receipts

The UK lost a skirmish in its July battle with the country’s current recession. The country’s tax collections came in £557 million (about $880 million) short. Less than $1 billion doesn’t seem like a very big deal, but a median estimate had suggested a surplus of £2.2 billion. Government spending rose 5%, while tax revenue fell.

The largest blow to tax receipts came from the closing of the UK’s North Sea Elgin field following a natural gas leak at a rig operated by Total SA (NYSE: TOT). About £1 billion of the total £1.7 billion shortfall in corporate tax collections is down to the closure of the Elgin field.

The UK’s total budget deficit grew in the first four months of the 2012-2013 budget year. During that period, spending rose 3.5%, tax receipts failed meet projections, and corporate taxes fell by 10.4%.

The government projected a loss of £120 billion for the current fiscal year, but one government research unit now thinks the deficit will reach £138.5 billion. An industry economist predicted that the UK would need to borrow more than £155 billion to pay its bills through the end of the fiscal year.

The British government now has a choice: to further tighten spending or to loosen spending a little in the hope that growth will reappear. Government policy calls for cutting the country’s debt and, so far at least, the government remains committed to that plan. Opposition leaders disagree, of course, maintaining that the current policy will not only lead to more deficit spending, but will also damage the economy over the long term.

Austerity took the upper hand in Britain when Cameron was elected prime minister. A few months of bad news is not likely cause the government to change course, but if the deficits continue a re-think may be in order.

Paul Ausick