Government borrowing ballooned by 50 per cent in the first two months of this year compared with the same period last year, and could soon exceed £50bn.
Analysis by the independent Institute for Fiscal Studies of the latest data on the public finances reveals tax revenues are growing much more slowly than the Government expected, while public spending is still on track. Borrowing has risen in April/May 2008 to £12.7bn, against £8.4bn in the same months last year.
The IFS cautions against reading too much into the figures for a relatively short time, but says the Chancellor, Alistair Darling, "has virtually no room left to manoeuvre against the sustainable-investment rule over the next few years", meaning that net public sector debt could easily exceed the 40 per cent of national income set by the Treasury.
Government receipts in April and May 2008 were 3.6 per cent higher than in the same months of 2007. The 2008 Budget implied that revenues for the whole of 2008-09 would be 4.8 per cent above 2007–08 levels.
Although the Government will receive some one-off windfall gains from North Sea oil taxation at a time of soaring oil prices, these will mostly be offset by the depressing effect the commodities boom is having on the economy as a whole. "Taking all factors together, it is far from clear that there will be a net gain to the public finances from the higher oil price."
Much depends on the prospects for growth. In his Mansion House speech on Wednesday, Mr Darling gave a hint that he will reduce his projections in this autumn's pre-Budget report.
Mr Darling said in his Budget in March that growth would be in the range of 1.75 to 2.25 per cent this year and between 2.25 and 2.75 per cent in 2009. Most independent observers agree with the bottom end of Mr Darling's expectations for the economy this year, but few are as optimistic about the ability of the economy to bounce back next year.
The CBI said on Monday that the UK would grow by 1.3 per cent, the lowest rate since 1992, with the nation facing a "very prolonged period of very sluggish growth". That figure was in line with an increasingly gloomy consensus, with some economists suggesting a full-blown recession would not take them by surprise.
A slowing economy will further depress tax revenues and push up benefit payments. Total Government debt is already predicted to be within a whisker of the 40 per cent ceiling ordained by the Sustainable Investment Rule, and the £2.7bn package of compensation for the 10p tax rate has made matters worse.
A reduction in growth of 1 percentage point boosts public borrowing by some 0.7 per cent of GDP, or roughly £10bn. Such an out-turn would push Mr Darling's public sector deficit well beyond the £50bn mark, a figure last seen during Norman Lamont's unhappy time at No 11.
A full-blown recession would see annual borrowing hit £100bn, with little chance of the budget being balanced over the economic cycle and, thus, the shredding of the "golden rule". Technical adjustments to the national accounts may help the Chancellor to a degree, but many feel that, with the scope for further tax rises effectively ruled out on political grounds, some trimming of public spending plans this autumn is inevitable.
Faced with a more challenging economic outlook, the Bank of England's chief economist, Charlie Bean, was yesterday promoted to be the deputy governor for financial stability. A "world- class economist", said the Bank, he will be succeed by Spencer Dale.Reuse content