3.8bn pound debt repayment gives boost to gilts

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THE Government paid back an unexpectedly large pounds 3.8bn of debt last month, prompting some City economists to revise down their forecasts of government borrowing for the financial year, writes Robert Chote.

The repayment helped to boost the price of long-dated gilts by suggesting that the Government might need to issue less debt next year than the market had feared. The 9 per cent Treasury stock expiring in 2008 gained 10 32 to close at 10513 32 . The Bank of England took advantage of the recent strength of long-dated gilts to announce tap issues of pounds 1.35bn of new long-dated stock.

Gilts were also boosted by a 0.1 per cent rise in factory output in December, which suggested economic recovery might help to rein in government borrowing more quickly than expected.

Factory output has been broadly flat through 1992, falling by 0.2 per cent between the third and fourth quarters, according to figures from the Central Statistical Office. Output was 0.8 per cent lower last year than in 1991, the third consecutive annual fall.

North Sea oil and gas production fell by 0.6 per cent in December, leaving output in the fourth quarter 6.3 per cent up on the third.

Overall industrial production - which accounts for just over a third of gross domestic product - rose 0.9 per cent between the third and fourth quarters.

Michael Saunders, of Salomon Brothers, predicts that the fourth quarter GDP figures - due on Monday - will show a small rise since the third quarter, more than accounted for by higher North Sea production.

The flat picture for manufacturing output overall masks considerable differences between industries. Metals, minerals, man-made fibres, mechanical engineering, vehicles, food, drink and tobacco showed significant falls in output in the quarter. Chemicals, electrical engineering, textiles and clothing showed rises.

Manufacturing production is nearly 8 per cent below its peak in the spring of 1990. The CSO said the trend rate of decline was now an annual 1 per cent, down from 1.5 per cent last month.

The factory output figures were in line with market expectations, but January's repayment of public sector debt was much better than forecast. Government spending was lower than expected, but the effects of recession meant that tax revenues remained weak.

Net departmental spending was lower than expected at pounds 18.3bn, 2 per cent higher than January last year. This is a much lower rise than in recent months, even excluding a central government grant to pay off local authority debt. The PSBR was also reduced by an unexpected repayment in the month of pounds 1bn of local authority and public corporation debt.

The public sector borrowing requirement in the first 10 months of the financial year was pounds 21.6bn, up from pounds 6.5bn at the same stage of last year. The Treasury forecast in the Autumn Statement that the deficit for the full financial year would be pounds 37bn, rising to about pounds 44bn in 1993/4.

The surprisingly buoyant January repayment prompted Midland Global Markets to cut its PSBR forecast for 1992/3 by pounds 1bn to pounds 38bn. Peter Spencer, at Kleinwort Benson, said the deficit could be pounds 2bn- pounds 3bn below the Autumn Statement forecast.