Osborne could miss targets as borrowing soars

The public finances deteriorated over August, with higher spending pushing borrowing to record levels, according to official figures.

The Office for National Statistics said the public sector net borrowing requirement, excluding financial interventions, had climbed to £15.9bn in August, the highest for the month since records began in the early 1990s, and well ahead of forecasts of just over £13bn. The comparable figure for August 2010 was £14bn.

The rise prompted warnings that the Government could miss the Office for Budget Responsibility's forecast for £122bn in public sector net borrowing for the full financial year. "If the overall performance of the first five months was replicated through the rest of the fiscal year, the [figure] would come in [at] around £127bn, compared to the targeted £122bn," Howard Archer, the chief UK economist at the forecasters IHS Global Insight, said.

The end result could be worse, as state finances are pressured by "muted economic activity eating into tax revenues and pushing up unemployment benefit claims," he warned.

But, in more reassuring news for the Chancellor, George Osborne, who has resolutely stuck to his deficit cutting plans, last year's borrowing figures were revised down by £5.9bn. The ONS also made downward revisions to borrowing figures for the first four months of the current fiscal year, something that was highlighted by the Treasury as it defended the news of the deterioration in the public finances in August. A Treasury spokesman also highlighted the fact that "tax receipts had continued to grow and spending so far this year has grown at the rate the OBR forecast in the Budget".

Still, notwithstanding the Government's insistence that its fiscal consolidation plans were the right the way forward, Mr Archer said he expected the Chancellor to "accept some slippage in his near-term fiscal targets rather than tighten policy further to meet them due to concern that more spending cuts or tax hikes will weigh down additionally on already limited growth prospects".

Philip Shaw, an economist at Investec, was more positive. "At first glance, the numbers look very disappointing," he said. "However, that's been offset by considerable favourable revisions to back data going back some way, so it's possible the outturn to this year is still consistent with the OBR's forecast but slow growth of the economy really is a threat to meeting that."

£35bn in missing taxes

The so-called tax gap – the difference between the theoretical amount that HM Revenue & Customs (HMRC) is supposed to net in tax and what it actually collects – stood at about £35bn for 2009-10. The figure, which equates to 7.9 per cent of liabilities, was below the 8.9 per cent of liabilities that went uncollected in the year before.

The reduction came after the Government sanctioned £917m in the autumn spending review for the HMRC to narrow the gap and raise extra revenues of £7bn by 2014-15.

HMRC said that around half of the £35bn gap could be blamed on small and medium-sized firms. Larger businesses accounted for around a quarter. Criminals account for 17 per cent of the gap. "The tax gap is the result of a wide range of behaviours and the challenges are constantly changing, but these figures show we are continuing to tackle non compliance," the HMRC Permanent Secretary for Tax, Dave Harnett, said.

The Exchequer Secretary, David Gauke, added: "Although these numbers show continued progress by HMRC in reducing the tax gap, there is no room for complacency. Just in the last few weeks, we have challenged offshore tax evaders, closed tax avoidance loopholes and created a new HMRC unit to ensure that the wealthier members of society pay their way."