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S&P doubts UK deficit target, says more tax revenue may be needed
[LONDON] Ratings agency Standard & Poor's said on Friday Britain's public borrowing was likely to be higher than the government had forecast and the country might need to find ways to raise more tax revenue to balance the books.
Finance minister George Osborne has said he intends to balance Britain's budget over the coming years through spending cuts alone, a pledge which will be central to the campaign of Prime Minister David Cameron ahead of national elections in May.
But S&P, the only major ratings agency not to have cut Britain's AAA rating, said the tax base might eventually need to widen, whoever is in power after May. "We expect that future consolidation may eventually look more to the revenue than the expenditure side," S&P said in a statement in which it confirmed it was maintaining a stable outlook for Britain's triple-A rating.
The ratings agency also said Britain's economy would suffer if it left the European Union, something Cameron has said he will put to a referendum in 2017 if his Conservative Party continues to hold power.
In its update on Britain's credit rating on Friday, S&P questioned forecasts from the country's budget office, which last week said it expected the public finances to be back in balance by the 2018/19 financial year.
S&P said it expected the deficit to fall only slowly in the 2014 calendar year to 5.4 per cent of gross domestic product and would decline towards 3 per cent by 2017 when the government's forecast is for the shortfall to be around 1 per cent.
Frank Gill, a director of European sovereign debt at S&P, said the outlook for higher tax revenues looked uncertain, and not only because of the slow pace of recovery in pay, which has hurt income tax receipts. "We are taking a very conservative view on the receipts side. It's not just the weak recovery so far in wage growth," he said in an interview.
Britain's big banking sector may not yield a windfall in tax revenues and its diminishing North Sea oil and gas industry was another potential source of weaker income, Gill said.
That could mean that whoever wins power in May has to consider new ways to boost tax revenue. "We expect that whatever government is in power and whatever policy bias in terms of cutting the fiscal deficit they may have, they are likely to be flexible," Gill said.
Britain's opposition Labour Party has said it wants to deal with the deficit in a "fair way" and has said it will introduce new taxes on expensive properties and restore a 50 per cent rate on income tax for top earners.