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PUBLIC SECTOR FINANCES JULY 2002

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Provisional estimates of the public finances show that in July: ...
Provisional estimates of the public finances show that in July:

- The public sector surplus on current budget was£5.3bn

- Public sector net borrowing was minus£4.9bn

-At the end of July public sector net debt outstanding was£311.1bn, equivalent to 29.8% gross domestic product

BACKGROUND NOTES

1.A guide to monthly public sector finance statistics is available here.It explains the concepts and measurement of the monthly data,plus those previously published,and gives some long runs of historical data.It is number 12 in the GSS methodological

guide series,ISBN 1 85774 296 6,(price£5).These background notes explain the monthly data.

2.The surplus on current budget is derived,as net saving plus receipts of capital taxes,from national accounts under the European System of Accounts 1995 (ESA95).It is the key measure for assessing progress against the golden rule,one of the government's two strict fiscal rules. This states that,on average over the economic cycle,the government should borrow only to invest and not to fund current expenditure.So to accord with the rule,the average surplus on current budget over the cycle should be positive.

3.Procedures for calculating net borrowing are discussed in the methodological guide.The surplus on current budget is obtained by subtracting net borrowing from an estimate of net investment.For central government this is checked against some monthly data for some current and capital transactions.

4.Net investment is defined as investment less depreciation.Investment is capital formation (acquisition of fixed assets,stocks and valuables net of any sales)plus net payments of capital grants.Data sources are:Capital expenditure :for central

government new procedures have been established to collect capital expenditure monthly from departments within a timetable needed for publication in this First Release. For local government, monthly capital expenditure data are not available,so estimates are made based on local government 's view of its expected capital expenditure for the year,updated by actual quarterly outturn data,and monthly

information on asset sales.

For public corporations there is a mixture of reported monthly capital expenditure figures and estimates.Depreciation is derived from a model that uses assumptions about asset lives and a rolling estimate of the public sector 's stock of capital assets derived from capital expenditure data. The

figures are reasonably stable through time so adequate monthly figures can be estimated that are consistent with the model's expected quarterly outputs.

5.Public sector net debt is built up by first calculating the public sector's financial liabilities that are related to the financing items of the public sector net cash requirement (PSNCR).

These are scored at face value.Liquid assets,mainly foreign exchange reserves and bank deposits,are then subtracted to reach net debt. Net debt in this First Release is calculated from the latest available measurement of the stock of public sector financing liabilities and liquid assets,and adding the change since then. implied by PSNCR.This method is refined by taking account of some other adjustments,such as revaluations of the foreign exchange reserves due to currency exchange rate movements,and discounts/premia on the nominal price of debt issued.

6.Public sector net debt is the key measure for assessing progress against the Government 's other strict fiscal rule,the sustainable investment rule. This requires that public sector net debt,as a proportion of Gross Domestic Product (GDP),will be held,over the economic cycle,at a stable and prudent level.The GDP figure used here is that for the 12 months centred on when the debt is measured.Hence

this requires an estimate of GDP to be available covering the period from six months before to six months after.

An entirely mechanical procedure is used to derive GDP figures for those periods where national accounts outturn data are not available,and to produce monthly GDP figures.The procedure computes the quarterly growth rate implied by HM Treasury 's last published forecasts of financial year

money GDP,and applies those growth rates to the latest quarterly GDP figure published by National Statistics.Monthly figures are derived by dividing the quarters by three.

7.Net borrowing is consistent with the definitions in ESA95.Public sector net borrowing is the Government 's preferred measure of the short term impact of fiscal policy on the economy

8.General government net borrowing reported in this release forms the basis of the reports of Government Deficit under the Maastricht Treaty.In the most recent release of government debt &deficit data,on 28 February 2002,a new European Regulation was implemented, changing the definition of general government net borrowing to be reported for the Excessive Deficits Procedure under the Maastricht Treaty.This

regulation requires that payments on Swaps are treated as interest payments;for all other purposes,including the national accounts and the Public Sector Finances First Release,such payments are shown as financing items, consistent with ESA95.

The Government Debt and Deficit under the Maastricht Treaty First Release now includes three versions of the deficit. It starts with the deficit consistent with the net borrowing shown in this release,then shows the effect of the alternative treatment of swaps and finally shows an alternative treatment of the government 's receipts for allowing the use of spectrum by third generation mobile phone companies.

UK interpretation of ESA95 is that these receipts should be treated as rents,which is the treatment used in the preparation of the Public Sector Finances First Release .Eurostat requires that for the Excessive Deficits Procedure,they be reported as being for the sale of assets;cash receipts of #22.5 billion were paid to government by the mobile phone companies during the second and third quarters of

2000.These are treated in Public Sector Finances as pre-payments of rent at the rate of #1 billion per annum over the life of the licences.For more detail please refer to the PSA homepage here.

9.The Current and capital accounts for each of the three sectors shown here are available quarterly.These appear in the quarterly Public Sector Accounts First Release,which is published with national accounts about 12 weeks after the end of the latest quarter reported.The release of Public Sector Accounts data leads to

revisions of the data published in Public Sector Finances.Monthly versions of the revised data,consistent with the quarterly Public Sector Accounts First Release,are released electronically as soon as is possible,often at the same time as the Public Sector Accounts First Release.They are also published in Financial Statistics early

in the following month.

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