Borrowing dampens tax hopes

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The Independent Online

Economics Correspondent

Government borrowing in June was pounds 1bn higher than expected for the third month running and the prospects for tax cuts in this year's Budget are receding, according to City analysts.

"There is not much scope for responsible tax cuts, which means the tax cuts we will get will be irresponsible," Robert Barrie, an economist at the securities firm BZW, said.

Yesterday's disappointing figures on the public sector borrowing requirement came days before the Chancellor, Kenneth Clarke, and senior Treasury officials hold their annual weekend meeting at country house Chevening to discuss the public spending round and budget tax measures. Officials expect the new Chief Secretary to the Treasury, William Waldegrave, to successfully beat off departmental bids for extra money. Sean Shepley, UK economist at Credit Suisse First Boston, said: "The Government will have to keep spending flat to hit the PSBR forecast. If it were serious about trying to balance the budget there would be no tax cuts either."

Yesterday's figures showed that the PSBR dipped to pounds 3.3bn last month, but the total in the first three months of the financial year was pounds 11.2bn.

This was the same as the first-quarter total last financial year and casts doubt over the attainability of the Government's forecast of pounds 23.5bn for the full year borrowing requirement.

Some special factors raised borrowing in June. Local authorities borrowed pounds 190m rather than making a debt repayment as usual at this time of year.

Public corporations' borrowing was higher than expected.

Interest payments on government debt were also about pounds 800m higher than the same month last year because the coupon payment dates on certain new gilt issues fall in June and December.

Even making allowances for these one-off effects, City economists found yesterday's figures disappointing because of slow growth in government revenues.

Total central government receipts were 7.3 per cent higher than the same month last year, compared with the Treasury's forecast of 11 per cent revenue growth this year. VAT receipts are only a little higher than this time last year and income tax receipts are lower.

Ciarn Barr, an economist at Deutsche Morgan Grenfell, said: "It is too early in the financial year to conclude that the Government will definitely overshoot its PSBR target, but the Chancellor needs to worry about tax revenues."

Although the outcome of the current public spending round is still in the balance, government expenditure so far this year has been kept under control.

Net departmental spending last month was lower than last June, and total government outlays are growing at a rate of 3-4 per cent a year, lower than predicted by the Treasury.