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Deficit-reduction target in doubt as tax revenues come up short

Doubts over Chancellor's ability to meet deficit target

The Government’s deficit-reduction programme is looking shaky after public finance figures for July, released yesterday, showed a disappointing boost to tax revenues in what is normally a bumper month for the Exchequer.

The Office for National Statistics said that total revenues rose by just 3.2 per cent on the same month a year earlier. July is one of the months when corporation tax is paid by companies, but the ONS reported that takings from this source were just £6.56bn, down  4.8 per cent on July 2013.

Spending in the month was up 1.9 per cent year on year. Total borrowing came in at £239m. That disappointed analysts, who had expected the public finances to reg-ister a modest surplus in the month.

“The deficit target is looking tougher to meet than the Government would have hoped for, or expected, given the performance of the economy,” said Sam Hill of RBC Capital Markets.

Labour’s shadow Treasury secretary, Chris Leslie, claimed that “the figures confirm that George Osborne is set to break his promise to balance the books by next year”.

In the fiscal year to date, the Government has now borrowed £37bn, compared with £35.2bn over the same four- month period in 2013-14.

John Hawksworth of the accountancy firm PwC said official forecasts from the Office for Budget Responsibility, showing the underlying budget deficit around £10bn lower in 2014-15 than in the previous year, now look “quite challenging” to achieve.

He said weaker than expected inflation was one of the reasons: “Tax revenues are driven by nominal growth in the economy and, while real GDP growth has been relatively strong over the past year, inflation has been more subdued, particularly as regards wages.”

ING Bank’s James Knightley said: “The Chancellor is probably going to have little room to offer a big pre-election giveaway next year.”

 However, the Treasury insisted that unusual receipt patterns last year, when people delayed bonus payments in order to benefit from the lower top rate of tax and a transfer under a Swiss tax- avoidance deal, distorted the year-on-year comparison.

“The public sector net borrowing figures continue to be in line with the Budget forecast, which predicts the deficit to have halved by the end of this year” said a spokesperson.

But there was also some disappointing news from retailers. The ONS reported that sales volumes edged up by just 0.1 per cent in July – less than the 0.4 per cent expansion that economists had expected.

Food sales fell 1.3 per cent by value in July, the first time the amount spent has declined since records began in 1989. Annual food inflation dropped to just 0.2 per cent during the month.

“The significant year-on-year deflation in the retail sector reflects the strong competition amongst retailers and confirms there are no substantial inflationary pressures in the economy,” said David Kern of the British Chambers of Commerce.

“The main priority for the Government and the Bank of England must be to underpin the [UK economic] recovery and introduce balanced measures that support exports and investment.”