Government borrowing on track to hit target

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The Independent Online
Government borrowing looks certain to be well within its target this financial year as official figures yesterday showed the strong economy was boosting tax revenues.

The Conservatives will be hoping for more good news on the economy today, with a further big decline in the number of unemployment benefit claimants expected. The one potential embarrassment will be the publication of the minutes of Kenneth Clarke's February meeting with the Governor of the Bank of England, when the Chancellor is thought to have turned down Bank advice to increase interest rates.

Separately, a survey of nearly 250 executives by the Chartered Institute of Management Accountants found that nearly two-thirds thought their businesses should pay more tax if the money were used to increase spending on education. A similar majority said the education system did not prepare young people adequately for working life. Of the large parties, only the Liberal Democrats have pledged to raise taxes for education spending.

The Government spent pounds 3.6bn more than it received in taxes last month, taking the cumulative public sector borrowing requirement (PSBR) to pounds 14.1bn in the first 11 months of the financial year. This compares with the target of pounds 26.4bn set in the last Budget.

Even with the traditional end-year spending surge in March, this suggests Mr Clarke could achieve a full-year total several billion pounds below his target. He will be helped by proceeds from the sale of the Housing Corporation's loan book this month.

"The Chancellor will be able to present much better figures than he forecast, not that it looks like doing him much good," said Kevin Gardiner, an economist at Morgan Stanley.

"You would have to go a long way back to find an incoming government inheriting such a favourable set of economic circumstances."

Most City analysts think the short-term outlook for government borrowing is favourable because the economy's fast pace of growth is boosting tax revenues. Receipts have grown by 8.5 per cent during the past year.

"It is not until the next recession that it will become apparent that there is an underlying problem with the public finances," said David Mackie, UK economist at investment bank JP Morgan.

Many experts in the City and elsewhere think government borrowing is on an unsustainable path, with the level of debt relative to the economy having climbed sharply since 1992. This week a paper from the National Institute of Economic and Social Research argued that spending had grown much faster than normal since 1992 given the state of the economy.

Yesterday's figures show expenditure this financial year running somewhat ahead of the Government's plans. Departmental spending has grown 3 per cent compared with the planned 2.4 per cent.

"The Government is finding it increasingly difficult to keep its own spending in check," said David Bloom at James Capel. Labour has pledged to stick to the Conservative plans if it wins the election.

The financial markets had another attack of the collywobbles, with share prices, gilts and the pound all falling yesterday. Analysts said this was related to international trends.

The pound fell by two pfennigs to just over DM2.66 and the FTSE 100 index dropped more than 16 points to 4,356.8.