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.
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