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GBPUSD Weighed Down By Increasing UK Deficit

James Boston
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GBPUSD Weighed Down By Increasing UK Deficit

Despite having arguably one of the most robust recovering economies in the developed world, the UK remains under a lot of pressure to control it’s budget deficit. It has been announced that September’s Public Sector Net Borrowing Requirement has risen significantly on the previous month, the figure now stands at £12.6Bn, up from the £10.883Bn needed to shore up finances in August, this took market analysts by surprise as a deficit of just £9.2Bn had been forecast.

Britain’s Chancellor of the Exchequer, George Osbourne, has pledged to return the economy to a budgetary surplus by the year 2020. A milestone to this plan, announced by the treasury six months ago, is an overall deficit reduction of £12Bn for the current fiscal year, not only is this significantly short of target at present but today’s figures suggest that rather than accelerating to reach target the deficit is in fact widening.

The vital statistics of the post crises UK look strong on paper. All sectors are exceeding growth targets and consumer spending is on the rise, controlled inflation and low unemployment are contributing to a steady recovery. But is this last element that is causing the budgetary issues for the Chancellor, with 6% unemployment there should have been a surge in income tax receipts to close the budget deficit gap, this has not happened.

Roughly fifty percent of Government income comes from income tax and so a return to low unemployment should have a significant effect on the income side of the budget. The issue is the structural nature of labour market in the UK after the crises. Wage inflation is almost non existent and those that have returned to the work force have done so on lower pay, others are declared as self employed giving significant tax write off advantages. The Chancellor will is now faced with further spending cuts or lowering the threshold at which employees enter the tax net, neither of which option will be easy to sell in a country that is by all accounts experiencing a boom.

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