Treasury borrowing fails to contract

Chancellor George Osborne faces a fresh borrowing headache this week as the impact of Britain's double-dip recession wreaks havoc on the public finances.

Just two months into the current financial year, experts warn Mr Osborne is already on course to bust the £92bn deficit forecast set by the independent Office for Budget Responsibility. May figures are set to show borrowing of at least £15bn – just as bad as last year at a time when the public finances are supposed to be improving.

April's borrowing figures were flattered by the transfer of £28bn of assets in the Royal Mail pension fund onto the Government books as well as profits from the Bank of England's liquidity support scheme for banking. But the underlying picture is deteriorating as a faltering recovery hammers corporation tax and income tax takings, according to Investec chief economist Philip Shaw.

"There is a good chance that May's numbers will be worse than last year due to a weakness in tax receipts," Mr Shaw said.

The main worry for the Treasury in the April figures was the anaemic 1.3 per cent growth in tax receipts – barely a third of the 3.8 per cent improvement pencilled in by the OBR over 2012/13, and well below a 3.7 per cent rise in departmental spending. A key barometer of business health – corporation tax takings – fell 11.5 per cent year-on-year.

Despite better news on inflation, which eased to 2.8 per cent in May, the alarming growth picture poses the biggest risk to the Treasury. In March, the OBR predicted a 0.2 per cent slide at the end of 2011 followed by a 0.3 per cent recovery at the start of this year but the economy shrank by 0.3 per cent in both quarters, plunging the UK back into technical recession.

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