Tough medicine needed as UK's debt pile grows, warns Osborne

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The Independent Online

Britain's public finances took a turn for the worse in June as public borrowing surged to a record £20.9bn, at least according to the public-sector net cash requirement, which counts payments when they are actually made.

The bleak figures were released as the Confederation of British Industry (CBI) warned that the strong growth shown by manufacturers in recent months is going to slow down.

By the Government's preferred measure of public-sector net borrowing, the debt in June was £14.5bn, down slightly from last year's £14.7bn but still £1bn worse than most economists had forecast. The figures were used by George Osborne to justify the coalition's plans for steep spending cuts. "The public finance numbers today remind us why we need to get on top of the budget deficit," the Chancellor said.

According to the Office for National Statistics, the overall debt now stands at £926.9bn, or 63.9 per cent of gross domestic product. The June blip was at least partly caused by a surprise 1.8 per cent fall in combined revenues from income tax, capital gains tax and national insurance.

However, even the surprisingly bad June figure still puts net borrowing for the year on track to come in below the level reached in 2009. Borrowing this year to date is also below last year. Economists also cautioned against reading too much into yesterday's numbers, with monthly borrowing figures prone to be highly volatile.

Philip Shaw, the chief economist at Investec, said the figures – including the cost of bailing out the banks – looked bad because last year's sums were flattered by a one-off gain related to a state-controlled bank.

"Overall, the state of public finances and the high level of borrowing is something we should be concerned about. We are still in a potentially dangerous situation," he said. "But it would be wrong to read too much into this month's figures when compared to last year. There was a one-off which we believe helped the figures of a year ago."

The CBI said the manufacturing sector saw output rising at the fastest rate in 15 years in the three months to July, as demand for British-made goods continued to strengthen and companies rebuilt their stocks. However, with much of the boost due to restocking, that growth is not sustainable over the longer term.

And Howard Archer, chief UK economist at IHS Global Insight, said factory owners faced other problems on the horizon. "Manufacturers have benefited so far in 2010 from healthier demand both at home and overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound and lean stock levels," he explained.

"However, the key question is can manufacturers sustain healthy growth over the latter months of the year and beyond, as inventory adjustment runs its course, fiscal policy is tightened substantially, the eurozone faces serious problems and the pound is modestly firmer overall."

Of the 439 manufacturers which responded to the CBI's quarterly industrial trends survey, 38 per cent reported that output rose during the last quarter, while 15 per cent said it fell. The resulting rounded balance of plus 24 per cent is the fastest growth rate since April 1995, when it was plus 26 per cent – and a marked improvement on the previous quarter's flat performance.

Ian McCafferty, the chief economic adviser at the CBI, said: "Looking ahead, production is expected to rise further, but at a more moderate rate. In our view, the risk of a double-dip recession remains low and the fortunes of the manufacturing sector are continuing to slowly and steadily improve."

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