U.K. Debt Troubles Back in the Limelight?

The euro zone may be hogging the spotlight when it comes to debt problems, but let’s not forget that the U.K. still has fiscal troubles of its own.

Just take a look at its latest public sector net borrowing data, for instance. The July report showed a public deficit of 557 million GBP instead of the projected 2.2 billion GBP surplus. Compared to July 2011′s budget surplus of 2.84 billion GBP, the recent shortfall highlights the persistent weaknesses in the U.K.’s finances.

Components of last month’s public sector net borrowing report showed that tax revenue fell by 0.8% while government spending jumped by 5.1%. Making the deficit much wider was the 1.8% drop in corporation tax, particularly in the oil and gas industry. As it turns out, the leak and resulting shutdown of the Elgin gas field in the North Sea was to blame for the sharp decline in tax revenues from that sector.

On top of that, economists are also saying that the U.K.’s bleak economic performance was the culprit for the drop in overall tax collections and the sudden rise in benefit payments for the unemployed.

You might be wondering “Shouldn’t the revenues from the recently held London Olympics offset those losses?” and that’s an excellent question, young padawan!

Unfortunately for the U.K. government, the tax revenues for the ticket sales during the Olympics will be accounted for during the month when the actual event took place. Since the London Olympic Games were held in August, the U.K. might have a lower than usual public sector net borrowing figure next month.

But before we get a hold of the August figures, let’s think about what these July figures mean for the U.K. economy.

Earlier this year, early estimates for government borrowing were for a figure of 120 billion GBP. Unfortunately, some are saying that if the current pace of the economy continues, the government will go over its budget target by as much as 30 billion GBP.

With the government having problems keeping its funds in check and the U.K. economy still stuck in a rut, what can Osborne and his men do to save the day?

On one hand, some feel that Osborne’s options may be limited as borrowing is already projected to go way above original forecasts. This hinders the government’s ability to take on even more debt to inject liquidity into the market.

One alternative though, would be to invest in debt-financed projects through the use of revenue bonds. Revenue bonds are bonds issued in order to finance a project. The proceeds of the project are then used to pay back the loans. The key, of course, is choosing which projects would be most supported and could generate the most jobs.

Whatever, the government decides to do, what seems certain is that the British government will not back off its austerity plans. If it were to suddenly abandon its cost cutting plans, it would simply lose all credibility and cause even more chaos for the economy.

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