A LOWER than expected Public Sector Borrowing Requirement last month

boosted both sterling and gilts and raised hopes that the deficit for

the full year to the end of March might be lower than the #50 billion

forecast by the Treasury.

The pound retrieved some of its recent losses and gained the better

part of 2 pfennigs on the German mark. The bull run in gilts continued

with supplies of the recently announced #200m of Treasury 8% 2003 and

#200m of Treasury 7[3/4]% 2006 both exhausted. The strength of gilts

market was one of the factors driving the FSTE-100 share index, up 16.7

points to 3025.0, to its fourth record in the last five trading days.

July is a good month for Government revenues with the self-employed

boosting income tax receipts and companies paying advance corporation

tax on their dividends. The PSBR also benefited from #1795m of

privatisation receipts from the first call on BT3.

Taking the month as a whole the PSBR was #1546m, well down on June's

#3972m. City economists had been looking for a shortfall of about

#1900m, but the range of forecasts was unusually wide with Barclays

economics department predicting #3000m and both UBS and Warburg going

for #1000m.

Too much should not be read into the PSBR figures so far. The fiscal

year is only four months old. The cumulative deficit is #14.9 billion

compared with #11.4 billion in the first four months of 1992/3.

Privatisation proceeds since the start of the year have totalled #3400m,

much the same as in the first four months of last year.

So far this year the central government's total cash receipts are 4%

higher at #66.8 billion. Within this Inland Revenue receipts are 0.5%

lower, but Customs and Excise revenues are 5.5% higher. Social security

contributions have increased by 3.5%. However, net departmental

receipts, excluding on-lending to local authorities and public

corporations, are 7% higher at #79.3 billion. Last year the PSBR

totalled #36.7 billion.

The pace of the recovery has been quicker than the Government thought

in March at the time of the Budget when it made its PSBR forecast. Any

undershoot will reduce the pressure on the new Chancellor of the

Exchequer, Kenneth Clarke, to increase taxes further in his Budget in

November.

Tax increases already announced by his predecessor, Norman Lamont, and

due to come into effect over the next two years, will boost Government

revenues by an estimated #10.3 billion, but this may not be sufficient

to bring the deficit in the public finances back to manageable

proportions, even after allowing for the recovery in the econony.

Last week the Bank of England warned that turning a blind eye to

public debt could endanger the Government's inflation target in the long

run, and said that further action might be required. Some economists

have suggested further tax increases of around #3500m will be required

in November.

* Students of Government statistics will have to waken up earlier from

next week. The release time of official data is to be brought forward

from 11.30 to 9.30am. Government sources said the Prime Minister was

responsible for the change to allow earlier information to the markets

and more informed analysis.

The Central Statistical Office, which releases the bulk of the data,

has already limited access to sensitive information and brought forward

release dates to reduce the risk of leaks. The US practice of releasing

sensitive economic information before the markets open has not been

adopted.