21 Sep 2011

Record borrowing clouds deficit reduction plans

The government’s borrowing for August was the highest since records began, adding to doubts that the coalition will be able to meet its deficit reduction targets this year.

Public sector net borrowing, excluding financial interventions such as bank bailouts, hit £15.9bn in August, up £1.9bn on the same month a year ago, the Office for National Statistics (ONS) said.

This was the highest figure for the month since records began in 1993.

The government borrowed more after income tax receipts fell for the first time in the month and expenditure rose after an unusually low figure in July. This leaves current net borrowing since March at £51.5bn, down £3.9bn on the same period the previous year.

John Hawksworth, chief economist at PwC told Channel 4 News: “Overall, the figures were marginally negative, suggesting some overshoot in public borrowing against target in 2011/12.

“If this is purely a soft spot and we see economic growth returning to target in 2012 and beyond then this kind of temporary cyclical overshoot in borrowing is of no great concern.

“However, if it is a sign of a more structural reduction in trend growth due to the economy being permanently damaged by the financial crisis, then more tightening measures are going to have to be taken in several years’ time to eliminate the structural current budget deficit.

“But you would not want to do that now while the economy is still so weak.”

The figures add to doubts that the chancellor can meet the Office for Budget Responsibility’s (OBR) target of reducing the deficit to £22bn this year. They will also heap more pressure on the chancellor’s austerity plans amid allegations the spending cuts are not helping the economy.

Political Editor Gary Gibbon listens to the whispers about how the government can increase spending while sticking to “Plan A”
“I spoke late last night to a cabinet minister who acknowledged that people within Whitehall have proposed scraping extra capital spending out of the system, beyond the departmental underspends and the dip into the reserve announced last week in the £0.5bn for infrastructure.”

Follow Gary on Twitter @GaryGibbonBlog

Treasury positive

The OBR’s estimates are based on assumptions that the UK’s economy will grow at 1.7 per cent this year, but even the chancellor has conceded this is too optimistic as the global economy falters.

There was some comfort for the government today after its borrowing figure for 2010/11 was revised down by £5.9bn to £136.7bn. Borrowing for the first quarter of 2011 was also revised down by £2.2bn and July’s figure was reduced by £2.4bn.

A Treasury spokesman said: “These are challenging times, but despite economic growth being lower than the OBR’s forecast earlier this year, tax receipts have continued to grow and spending so far this year has grown at the rate the OBR forecast in the budget.

“These figures also include a welcome and substantial downward revision to borrowing so far this year and to overall borrowing last year.”

Quantitative easing