Uk deficit

The uk deficit will narrow more than expected even as the economy grows more slowly than the previous government forecast, the U.K.'s new fiscal watchdog said in a report prepared for the June 22 emergency budget.

The deficit will narrow from 155 billion pounds in this fiscal year to 71 billion pounds ($228 billion) by April 2015, the Office of Budget Responsibility said in London today. That's a 22 billion-pound improvement on the previous forecast. Gross domestic product will rise 2.6 percent next year, instead of the 3.25 percent predicted by the Labour government in March.

The report lays the ground for Chancellor of the Exchequer George Osborne to outline the deepest spending cuts in a generation in next week's budget. The pound has fallen 10 percent against the dollar this year and Fitch Ratings said last week that Prime Minister David Cameron's coalition government will need to step up the pace of reductions to protect Britain's top credit rating.

Former Bank of England policy maker Alan Budd and his colleagues in the OBR will release revised forecasts on June 22 to take account of the budget measures. Budd told reporters today he resisted the temptation to be overly pessimistic in his predictions, calling them the "best shot at an impossible task."

The forecasts "have taken a surprisingly optimistic view of the outlook for the U.K. public finances," Jonathan Loynes, chief European economist at Capital Economics Ltd. in London, said in an e-mail. "On the face of it, they might seem to relieve the pressure for an additional fiscal tightening, or even make room for tax cuts. But we suspect that the government will still want to err on the side of caution, if only for political reasons."

The OBR said that the uk deficit as a percentage of GDP would fall to 3.9 percent by 2015 from 10.5 percent. Net debt would increase to 74.4 percent of economic output.

Sterling climbed 1.2 percent to $1.4730 as of 10:47 a.m. in London and was little changed at 83.18 pence per euro. The 10- year gilt yield was three basis points higher at 3.50 percent, after reaching 3.52 percent.

Osborne created the OBR to provide forecasts that are independent of the government. The six-week old coalition is pinning the blame for Britain's record peacetime budget deficit on Labour, in power from 1997. Gordon Brown was chancellor in that government for 10 years before taking over as prime minister in 2007.

Cameron said last week Brown left the public finances in a worse state than he anticipated and warned that the squeeze to come will "affect every single person in our country."