£15bn boost for Treasury before pre-election Budget

Bumper February gives Chancellor extra room for manoeuvre in Budget

The Chancellor is on course to beat his own projections for government borrowing this year, and should be able to enjoy between £5bn and £15bn of extra room for manoeuvre in his Budget next week, the latest figures on public borrowing suggest.

As the current fiscal year draws to a close, the Office for National Statistics said that the public finances enjoyed a bumper February, with borrowing coming in at £12.4bn – dramatically below analysts' expectations of about £15bn.

The ONS also revised down the exceptionally bad figures for January published previously, and for some earlier months. Remarkably, the January number has been changed from a deficit of £4.5bn to just £43m, close to the surpluses usually enjoyed in that month. The cumulative government deficit so far this year stands at £131.9bn, against a forecast in the pre-Budget report of a borrowing total of £178bn. With only one more month's data due, it seems likely that Mr Darling will undershoot his own estimates, perhaps by as much as £15bn.

Lower than anticipated unemployment has limited the rise in benefit payments, while the economy's return to growth and the revival in housing and equity markets have boosted revenues. The restoration of VAT from 15 per cent to 17.5 per cent on 1 January has also helped: VAT revenues are up 17 per cent on last year. Income tax, national insurance and capital gains tax receipts are up strongly.

The decline of 47,400 in the unemployed claimant count in February was the biggest drop since 1997, and underlines the way that the resilient labour market is benefiting the public finances. The special tax on bankers' bonuses also seems likely to yield about £2bn more than ministers expected, but it will not be paid until August; the cost to the Exchequer of supporting the financial system is also set to be lower than feared at the height of the crisis last year. Public borrowing will probably be closer to 12 per cent of GDP than 13 per cent this year, as previously forecast – still one of the highest borrowing rates among the advanced economies.

Jonathan Loynes, the European economist at Capital Economics, said: "February's public finances have provided Alistair Darling with a very timely boost ahead of next Wednesday's Budget. Mr Darling now looks likely to have a little wriggle-room in the Budget to either cut borrowing or fund a few pre-election sweeteners. We suspect that he will choose the latter to harden the election battle lines."

However, Mr Loynes warned: "Either way, though, it is clear that much more decisive action will be required to address the fiscal position once the economy is strong enough to withstand it."

Indications from the Treasury that next Wednesday's Budget will maintain the theme of "supporting the recovery" might mean that Mr Darling will use his windfall to increase assistance to industry, and especially smaller businesses that are still finding bank credit difficult or expensive to find.

The shadow Business Secretary, Kenneth Clarke, yesterday said: "If we can avoid putting up national insurance, we will do so. Raising national insurance is a disastrous choice for a business-friendly government to make. It's a tax on jobs."

Also speaking at the British Chambers of Commerce conference, Lord Mandelson said: "I think we need a new focus on boosting exports. Public spending and consumer debt is not going to drive our economic future and drive growth. Exports are going to do that."