PSBR heads towards pounds 3bn overshoot

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The Independent Online

Economics Editor

Government borrowing is likely to be pounds 2bn to pounds 3bn over target this financial year, limiting Chancellor Kenneth Clarke's scope for tax cuts in the next budget.

The most serious slippage in the public sector finances is alarmingly slow growth in government revenues. Tax receipts are likely to be up to pounds 2bn lower than forecast at the time of last November's budget - and pounds 7bn lower than the level predicted in the previous budget.

Spending by Whitehall is also running ahead of plans and could overshoot by about pounds 1bn, unless some expenditure can be clawed back successfully this month. This could be difficult in a month when departments have usually rushed to spend as much as possible before the year-end.

Andrew Smith, shadow Chief Secretary to the Treasury, said: ``Public borrowing is still running at a very high level, reflecting weakness rather than strength in the economy.''

The Treasury said borrowing remained on a downward trend, a conclusion backed by most City analysts. ``There is now some clear improvement in the public finances this year compared to last,'' said Simon Briscoe at Nikko Europe.

However, many thought future borrowing would also overshoot the Budget plans, thanks to tax cuts announced last November taking effect and the 4 per cent pay awards in the public sector. Kevin Darlington at Hoare Govett said borrowing would continue to shrink but would remain above the Maastricht ceiling of 3 per cent of GDP.

The gap between government revenues and spending was pounds 3bn in February, the last but one month of the financial year. It would have been higher, except for an unexpected pounds 1.5bn in privatisation receipts from BAA shares, electricity company bonds and the second part of the Genco2 sale.

Revenues have increased 9 per cent this financial year, compared to a Budget forecast of 9.6 per cent for the full year. Lower inflation has led to slower revenue growth. VAT receipts account for much of the shortfall, possibly due to lower spending on consumer goods liable for VAT.

Spending was up 4.3 per cent in the 11 months to February, above the Budget forecast of 3.8 per cent for the year as a whole.

Debt interest payments have been higher than expected, at pounds 21.5bn since last April compared to pounds 19.1bn at the same stage last financial year. Local authorities are also likely to be in the red. They made a monthly debt repayment of pounds 757m in February, and have repaid pounds 0.5bn in 11 months. However, they have borrowed pounds 1.6bn on average every March to use up the remainder of their annual budget. If the pattern is normal this year, they are unlikely to meet the target of a pounds 0.1bn debt repayment for the full year.

Economists said that on last month's trends, the full-year Public Sector Borrowing Requirement (PSBR) would be pounds 31-32bn, compared with a target of pounds 29bn set in the November budget. This is much smaller than the Treasury's average pounds 10bn error in forecasting the next year's PSBR.