PSBR on target but strong pound savages industry confidence

Government borrowing this year is likely to meet Gordon Brown's ambitious target, the latest figures suggest. Meanwhile, businesses pleaded for relief from the Bank of England in the form of no more increases in interest rates, reports Diane Coyle, Economics Editor.

Days after the Chancellor found an extra pounds 300m for the crisis-torn NHS, new figures yesterday showed that the public sector borrowing requirement (PSBR) jumped to pounds 3.1bn last month, far more than expected.

But City experts shrugged off the September increase as the result of special factors. Most highlighted instead the surprisingly low growth in public sector spending.

"Despite slightly disappointing September figures, the underlying trend in the PSBR continues to show a fairly spectacular improvement from a year ago as spending falls short," said Adam Cole, an economist at City firm James Capel.

Separately, the quarterly survey of business from the British Chambers of Commerce (BCC) highlighted the gap between the fortunes of industry and services. The strong pound has "savaged" manufacturing export activity, the BCC said, taking confidence to a five-year low. Both export orders and overseas sales had deteriorated in the latest quarter.

"We don't want to see further increases in interest rates which would fuel further rises in sterling. That's the critical point," said Ian Peters, deputy director-general of the BCC.

On the other hand, services reported the highest levels of optimism since the late 1980s and record levels of investment and employment. Their one problem was the worst recruitment difficulties this decade.

David Richardson, the BCC president, indicated that the Government should have raised taxes on consumers to reduce the need for higher interest rates to slow down the economy. Yet yesterday's PSBR figures showed that even without extra taxes government borrowing is shrinking fast.

The Government has borrowed pounds 8.6bn since 1 April, the start of the financial year, compared with pounds 15.7bn at the same stage last financial year. Excluding privatisation receipts the cumulative total has shrunk from pounds 19.4bn to pounds 10.4bn. Analysts all said Mr Brown would at worst meet this year's pounds 10.9bn target, and could do even better.

Central government expenditure fell sharply last month. Departmental spending picked up modestly during the month, taking it to a level just over 1 per cent higher than a year earlier. Not only is this well within the Treasury's forecast for annual spending growth of 1.7 per cent, but expenditure during the first six months of the year also remains 1 per cent below the previous year's level.

The comparison has been helped by some pre-election accounting which classed the sale of Ministry of Defence housing and the student loan book as negative spending. However, rapidly falling unemployment and very restricted growth in public sector pay has helped keep the lid on spending.