pounds 3bn borrowing surge dampens tax hopes

The Chancellor's scope for responsible tax cuts in the next Budget shrank even further yesterday with the news that government spending was pounds 3.2bn more than its income last month. Without pounds 1.1bn in privatisation revenue from the sale of Railtrack the gap in the Government's finances would have yawned even wider.

Adam Cole, an economist at brokers James Capel, said it left Kenneth Clarke "with only one policy lever to pull ahead of the election - lower base rates". In his Mansion House speech last week the Chancellor insisted that bringing the government budget into balance in the medium term was a key policy aim, and he would make sure it was achieved.

But the City was disappointed by yesterday's figures, which showed borrowing adjusted for privatisation receipts was higher in the first two months of this financial year than at the same stage last year.

Andrew Smith, shadow chief secretary to the Treasury, said the figures called into question the Chancellor's claim that public borrowing was on a downward trend.

Liberal Democrat Treasury spokesman Malcolm Bruce said: "It is clear the Government is heading for another blow-out on borrowing this year."

Mr Clarke is expected to adjust upwards his target for the public sector borrowing requirement when the Treasury publishes its new economic forecast next month.

City experts think the total for 1996/97 could be up to pounds 8bn higher than the current target of pounds 22.4bn.

That would mean very little shrinkage compared with last year's PSBR of pounds 32.2bn, itself pounds 3bn higher than the target set last November.

The reason for their scepticism is the toughness of the expenditure plans. The Govern- ment has successfully held spending to its ambitious targets for the past three years, and has an increase of only 1.2 per cent planned this financial year. If this is achieved it would mean a reduction in real terms.

Geoffrey Dicks, UK economist at NatWest Markets, believes a cut in real expenditure is "near-impossible in a pre-election year".

Departmental spending grew 3.3 per cent in the year to May, down from April's 7.3 per cent increase but well above the target. Much of the over- run in the first two months of the financial year has been on the social security budget rather than across all departments, and it is probably too early to conclude that the pattern has been set for the year as a whole.

"The slowdown in spending growth in May is encouraging, but it will need to be maintained in the months ahead," Jonathan Loynes, an economist at HSBC Markets, said.

After the concern about "missing" tax revenues towards the end of the last financial year, their growth has now started to overshoot the Treasury forecasts. Government receipts were 6.7 per cent higher in the year to May despite a 5 per cent fall in income tax revenues.

A combination of high income tax receipts last May and this year's tax cuts probably explains the drop.

VAT receipts, fingered as one of the main culprits for last year's shortfall, were up 16 per cent. However, revenue from corporation tax, the other problem area in 1995/96, was flat.

The headline PSBR in May was exaggerated by an unexpectedly small repayment of borrowing by local authorities. They were in surplus by only pounds 100m this May, pounds 500m less than a year ago. Local authority reorganisation might explain why they spent more early in the financial year. As local authority borrowing is more or less capped over the year as a whole, this disapointment will be reversed later on.

Comment, page 17

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...