Debt repayment reaches pounds 5.7bn

The Government's finances are in better shape than anybody expected. The reason is Gordon Brown's success at beating even the tough Tory spending targets, as Diane Coyle, Economics Editor, reports.

The Government repaid pounds 5.7bn of its debt in October, taking its borrowing for the financial year so far to just pounds 2.6bn compared with pounds 11.2bn at the same stage last year.

The one-off sale of Ministry of Defence housing makes the comparison unfair. Even so, City analysts were unanimous yesterday in predicting that the Chancellor of the Exchequer would be able to announce a target for the public sector borrowing requirement this year of some pounds 2bn below the target he set in July.

The strong economy has helped deliver the improvement in borrowing, boosting the tax take and helping reduce expenditure on social security payments.

Yesterday's figures showing a surplus of government revenue over expenditure in October benefited from pounds 10.8bn in corporation tax receipts, a pounds 1.7bn increase on the same month last year. There will be another tax bonus from windfall tax revenues of pounds 2.6bn due in December.

The picture for total tax revenues is more mixed, however. Income taxes were up strongly year-on-year but customs and excise receipts such as VAT were, surprisingly, lower than a year ago.

The main reason for the better-than-expected borrowing figures published yesterday is the Government's ultra-tough control of spending. Departmental expenditure in the first seven months of this financial year is 0.7 per cent lower than last year, much less than the annual growth rate of 1.7 per cent pencilled in by the Treasury.

Spending is likely to increase over the course of the next few months. Departments traditionally catch up in the final month or two of the financial year if they face the risk of an underspend being carried over into the subsequent year's allocation.

Many economists also expect the pressure for higher spending on health and education to derail the Iron Chancellor's targets in the end.

David Hillier, UK economist at Barclays Capital, said: "We all expected slippage in the spending plans after the elections and you have to give them credit for avoiding that. But I don't think a Labour Government will carry on delivering negative spending growth."