Public finances slide deeper into red

Chancellor may have to raise taxes again. Surge in spending breaks Government's early pattern
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The Uk's public finances plunged into the red last month as spending surged and tax revenues weakened, official figures showed yesterday, raising fears that the Treasury will raise taxes to fill a growing shortfall.

The Uk's public finances plunged into the red last month as spending surged and tax revenues weakened, official figures showed yesterday, raising fears that the Treasury will raise taxes to fill a growing shortfall.

The Government had to borrow £10.1bn of cash last month, its largest deficit for a June and taking the shortfall so far this fiscal year to £16.1bn.

A quarter of the way through the financial year the deficit is already half the Government's full-year forecast of £32.4bn. The Treasury's preferred measure that smoothes out volatile movements, public sector net borrowing (PSNB), also jumped, but less dramatically.

PSNB in June was £4.8bn, more than double last June's £2.1bn. The total for the first three months of the year is now £13.8bn compared with a forecast of £27bn for the year to March 2004.

Economists in the City said that, at the current rate, the Government was on track to rack up a deficit of as much as £37bn. This raised fears that Gordon Brown would have to raise taxes again to fill a widening "black hole" in the public finances. It would also put the UK in breach of the European stability and growth pact.

"Today's public finance figures were very poor," said Philip Shaw, chief economist at Investec. "Were these trends to persist, we would be approaching 'black hole' territory."

The plunge into the red was driven by a surge in government spending - breaking the pattern of the first six years of Labour government when it continually fell short of target.

Public sector net investment has risen by 181 per cent so far this fiscal year, three times the 67 per cent pencilled in for the full year by the Treasury. Day-to-day current spending is up 8.2 per cent to date compared with a target of 6.5 per cent. In contrast, tax receipts have risen 5.6 per cent rather than the 7.0 per cent target. A slowdown in corporation and income tax revenues was only partly offset by bumper VAT payments.

The Treasury yesterday declined to say whether it would again revise up its forecasts in November's pre-Budget report. "We are still on course to meet our tough fiscal rules over the cycle," a spokeswoman said. Independent analysts agreed the Government would balance the books over the cycle but said there was mounting concern over a public finance crisis further into the future.

Christine Frayne, a senior research economist at the Institute for Fiscal Studies, said: "We fear the Chancellor's medium-term forecasts may be too optimistic - even if the economy bounces back as sharply as he expects.

"If so, further tax increases would then be needed to be confident of continuing to meet the Government's fiscal rules with the comfort the Chancellor has looked for in the past."

This does not include any further additional growth in health and education spending in the next spending review or extra cash to meet targets on child poverty. The National Institute of Economic and Social Research has warned that, together with an ageing population, this could force the Government to impose a £20bn tax hike to balance the books.

"Widening budget deficits are here to stay," said John Butler, UK economist at HSBC. "While the 'golden rule' will undoubtedly be tested, there is likely to be little urgency for the Government to raise taxes ahead of the next election."

There was a silver lining for the Government from the figures as the strength of public spending in the quarter will boost estimates of economic growth. Figures published next week are expected to show quarterly growth of 0.3 per cent in the three months to June, following the decade-low of 0.1 per cent in the first quarter.

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