Blow for George Osborne as borrowing hits £37 billion

Shock increase casts more doubt over the Chancellor’s ability to meet the target of the Office for Budget Responsibility fiscal watchdog

Chancellor George Osborne’s efforts to tackle the deficit were dealt a surprise blow after shock figures showed borrowing running £1.8 billion ahead of last year despite the strongest growth since 2007.

Analysts said Osborne had virtually no breathing space for electoral giveaways just nine months before polling day after the surprise, £800 million deficit for July — usually a surplus month due to quarterly tax receipts. This puts borrowing for the first four months of the financial year so far at £37 billion, well ahead of the £35.2 billion seen last year.

It also casts more doubt over the Chancellor’s ability to meet the target of the Office for Budget Responsibility fiscal watchdog, which forecasts borrowing of £95.5 billion for the full year, after one-offs like dividends from the Bank of England’s money-printing programme to the Treasury’s coffers are stripped out.

With a third of the year gone, the public finances are on course to overshoot the watchdog’s target by more than £10 billion at the current rate  of increase.

ING Bank’s James Knightley said: “The OBR’s full-year forecast is going to be difficult to hit, meaning that the Chancellor is probably going to have little room to offer a big, pre-election giveaway next year.”

Tax receipts were inflated last year as many companies held back payments to benefit from the fall in the top rate of income tax to 45 per cent last April. But worryingly for the Chancellor, corporation tax receipts were also down 4.8 per cent year on year and the Government faced an extra £1 billion spending bill which went mainly on pensions.

Royal Bank of Scotland economist Ross Walker warned: “There are significant fiscal challenges ahead beyond the election. The big picture is that we have been running a little behind on the tax revenue part of the equation. It’s been a little bit sluggish given the growth we have had.”

Walker added that the weak tax performance supported the OBR’s case that the lion’s share of the deficit is structural and lingers on despite any improvement in the economy.

The Government took more in VAT receipts which rose 3.9 per cent £10.3 billion. A still-buoyant housing market inflated July’s tax-take by £100 million over last year to £1.3 billion.  Retail figures for July also disappointed today as sales growth virtually ground to a halt, rising just 0.1 per cent.

No end to eurozone’s economic woes

THE eurozone’s economic plight lingered on in August as growth among the region’s private firms stuttered even before the full impact of Russian sanctions.

Official figures showed the single-currency bloc grinding to a halt between April and June, dragged lower by a shrinking economy in Germany and a stagnant France.

Today’s snapshot from financial data provider Markit did little to provide cheer as its index, where a score over 50 signals growth, slowed from 53.8 to 52.8 amid more signs of weakness from the region’s twin powerhouses.

The survey at least indicates modest growth but comes before the sanctions war between Europe and Russia over its support for Ukrainian rebels fully kicks in. Markit senior economist Rob Dobson said. “We are not seeing a recovery taking real hold as yet.”

ING’s Martin van Vliet said: “Today’s figures will undoubtedly reinforce pressure on the European Central Bank to do more to support the recovery and bring inflation back to the target. However, we still think that the ECB will remain on hold in the coming months.”

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