Public borrowing puts tax cuts in doubt

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Economics Correspondent

Prospects for a tax-cutting Budget in November were dimmed by disappointing public sector borrowing figures yesterday. The Government is likely to overshoot its borrowing target for this year despite the tough talk by Kenneth Clarke, the Chancellor, about the public finances in this week's Mansion House speech, analysts said.

``The emphasis is back on spending cuts if Mr Clarke wants to make meaningful reductions in taxes this year,'' said Robert Barrie, UK economist at City firm BZW.

The Treasury is due to publish its summer economic forecast on 28 June, in the early stages of this year's public spending round. It is now expected to predict a higher public sector borrowing requirement for this financial year than the pounds 21.5bn it forecast in last year's Budget statement.

The forecast will be scrutinised for clues about spending and tax plans. ``They might prefer to bring out the bad news now in the hope of springing a pleasant surprise at Budget time,'' Mr Barrie said.

The PSBR was pounds 4.1bn last month, up from a revised pounds 3.8bn in April and well above expectations. The total for the first two months of the financial year was only pounds 800m below last year's level. The PSBR needs to be an average of pounds 1.2bn a month lower than last year in order to meet the Budget target of a pounds 21.5bn deficit. ``This is looking a tall order,'' said economist Kevin Darlington at Hoare Govett.

The small increase in government spending to pounds 22.6bn between April and May was in line with analysts' expectations. The surprise came from lower- than-expected receipts.

Total government revenues fell to pounds 18bn in May. A big drop in corporation tax receipts was explained by the lumpy timing of payments by companies. The big payment months are July and October. However, income tax receipts fell while Customs & Excise revenues, mainly VAT, rose by less than forecast.

Although the year-on-year growth of government revenues is not quite as weak as it has been in recent months, it is lower than many economists would expect, given the pace at which the economy has been expanding. There is a particular puzzle over the slow growth in VAT receipts.

Tax revenues need to grow at an annual rate of above 10 per cent if the Government is to hit its PSBR target. Several City economists have revised estimates of this year's borrowing requirement up to about pounds 25-27bn as a result of the slowdown in growth affecting tax receipts.

Gilts prices fell yesterday until the US Treasury market rescued them from the doldrums.