City analysts were forecasting an overshoot of pounds 3bn on the public sector borrowing requirement after a further setback in January. Although there was a surplus of pounds 3.7bn, this was less than expected following an unexpected collapse in VAT receipts. With only two months left in the financial year, the PSBR for 1995/96 is now set to show only a small improvement on the pounds 35.9bn deficit in 1994/95.
Adam Cole, UK economist at James Capel, said: "We expect an overshoot of around pounds 3bn as both spending and revenues disappoint relative to the Chancellor's forecasts." Michael Saunders, economist at Salomon Brothers, also raised his forecast for the PSBR in 1995/96 to pounds 32bn.
A drop of pounds 700m in VAT receipts compared with a year earlier was a principal reason why the net public sector repayment in January was pounds 1bn pounds less than the City had been anticipating. Analysts had pencilled in a substantial surplus of about pounds 5bn because of the bunching of corporation tax payments in January.
However, the unexpected fall in VAT was only one of several setbacks on both revenue and expenditure fronts. Total receipts were up by 9 per cent in the fiscal year to January, less than the 9.6 per cent forecast for the full year at the time of the Budget. Spending was also running above the Government's target of 3.8 per cent.
The fall in VAT receipts brought their total growth in the fiscal year so far to just 1.6 per cent compared with a full-year forecast by the Treasury of 5.2 per cent. According to the Treasury, the plunge in VAT revenue was mainly because of higher repayments. One explanation advanced was that the fall was related to stock-building. Firms can reclaim on VAT paid on inputs when output goes into inventories. However, economists are now expecting a rundown rather than a build-up of stocks after the big increase in inventories last year.
Another disappointment came over corporation tax. While there was reasonable growth of 18 per cent compared with January 1994, the increase was less than had occurred earlier in the financial year.