pounds 3bn borrowing overshoot cools hopes of tax cuts

The Government borrowed over pounds 3bn more than its target in the financial year to March, leading City economists to conclude yesterday that there was no room for tax cuts in the next Budget, writes Diane Coyle.

With inflation flat last month, rather than falling as expected, the City believes there is no scope for lower interest rates either. Kevin Darlington, at Hoare Govett, said: "The electoral bias will be to go for another cut, but financial markets would punish ill-founded policy movements."

There was further evidence yesterday of the gradual pick-up in the economy that has turned the tide of opinion on interest rates. Sales growth among service businesses was the highest for a decade in the first quarter of this year, according to the British Chambers of Commerce, although manufacturing remained weak.

Separate figures showed a 5.3 per cent jump in car production in the first quarter. Output for export was up 11.3 per cent while home car production was down a fraction.

The gap between government spending and revenues in 1995/96 was pounds 32.2bn, compared with targets of pounds 29bn set in the last Budget, and pounds 21.5bn set in the 1994 Budget. "Tax cuts in November's Budget would be hard to justify," said David Walton at Goldman Sachs.

Excess spending accounted for pounds 1bn of the overrun, while lower corporate taxes, VAT and income tax revenues explained the rest. Economists regard missing the spending target by "only" pounds 1bn as an achievement, while corporate and income taxes were seen as acceptably close to their target.

However, the shortfall in VAT revenues during the past 12-18 months has the Treasury puzzled. It has research under way to find out the cause.

A spokesman said yesterday that the public sector borrowing requirement remained on a downward trend. It was pounds 3.7bn lower than in the previous financial year, or almost pounds 8bn when privatisation receipts are excluded.

The City thinks government borrowing is likely to fall further this year, but most experts see the Chancellor's pounds 22.4bn target as over-ambitious. Independent forecasters put it at between pounds 25bn and pounds 30bn.

Separate figures showed headline retail price inflation unchanged at 2.7 per cent last month. The target measure, excluding mortgage interest payments, stayed at 2.9 per cent, compared with the 2.5 per cent target.

There was upward pressure from house prices, seasonal foods and leisure goods, offset by lower prices for petrol. Weather accounted for many of the seasonal food price increases. Cold weather in Spain raised lettuce and tomato prices.