Another disastrous month - and George Osborne is forced to cut deeper

Public sector finances suffered from a 20 per cent fall in corporation tax receipts from business while public spending rose by 5 per cent, fuelled by higher benefit payments

Spending departments across Government have been warned to brace themselves for further budget cuts in the autumn after new figures revealed that Britain’s public finances are rapidly deteriorating.

Statistics released today by the Office for National Statistics showed that Government borrowing figures had exceeded official estimates for every month during the financial year so far.

The ONS said that in July the Government was required to find an extra £600m to plug the gap between spending and tax revenues, having registered a £2.8bn surplus in the same month in 2011.

In the four months since George Osborne’s March Budget the Government has now borrowed £9.3bn more than it did over the same period last year.

Treasury officials are now warning that if the trend continues Mr Osborne could forced cut back still further of public sector expenditure in order to meet the Government’s target of eliminating the structural deficit by 2017 when he makes his autumn statement in November.

As a result major Government spending departments have been privately warned by the Treasury to prepare for the possibility of a fresh round of cuts.

Key targets are likely to be welfare spending – which already accounts for the lion’s share of Government outlay - and international development aid which has so far escaped unscathed by cut backs.

A Treasury source said: “The truth is what you see in the data is a pretty terrible four months which, for each one, since April has been worse than expected.

“We will have to see what happens over the next three months as we get more data. But obviously the Chancellor has the power to alter the spending allocations to take account of fiscal events.”

The source said much would depend on whether the independent Office of Budget Responsibility – which is tasked with providing estimates on the health of the public finances – concludes that the borrowing overshoot can be offset in future years.

But with senior politicians increasingly pessimistic about avoiding a partial collapse in the eurozone many in the Treasury believe that the OBR will revise up its borrowing forecasts in its next report.

In that case Mr Osborne would be forced to either raise taxes, cut public sector spending still further or abandon his borrowing targets.

A senior civil servant said: “The ideas being kicked around are the kind of unmentionable economies that would make your eyes water.

“If it comes to it you will see the end of some big cross departmental projects. There simply isn’t enough money coming in.

“This isn’t Plan B. We already have a plan B and it isn’t working. That was to get the banks lending and move on big infrastructure projects. It’s not happening. Now we’re into Plan C territory, which means more retrenchment.”

Another source said: “There is clear concern in the Treasury and there are growing signs that the spending settlement is going to be re-opened.”

The OBR forecast in March that total public borrowing for the 2012/13 financial year would be £119bn, an improvement on the £125bn the Government borrowed in 2011/12. But City analysts said yesterday that the total deficit for this year was now likely to come in much higher than this and warned that the outlook for public borrowing in future years was increasingly bleak too.

“At this rate, borrowing for 2012/13 overall will massively overshoot the OBR’s forecast by over £35bn. And with the recovery falling well short of the OBR’s expectations, we think that the Government will struggle to cut borrowing at all next year either” said Vicky Redwood of Capital Economics.

Public sector net debt now stands at above £1 trillion, compared to £940 billion a year ago, and represents 65.7 per cent of the UK's GDP, up from 61.8 per cent last year.

The dramatic deterioration in July’s borrowing figures was largely attributable to the temporary shutdown of the Elgin gas field in the North Sea in the first half of the year, which hit energy production and caused a 20 per cent fall in corporation tax receipts on the same month last year. But even allowing for this distortion, the trend in public borrowing over the past four months has still been much weaker than ministers and the OBR expected.

Tax receipts are up 1.1 per cent on the same period last year and there was a 3.6 per cent increase in government spending. That contrasts with the OBR’s March prediction that tax receipts over the full year would grow by 3.9 per cent and that government expenditure would increase by just 3.1 per cent. Social benefit payments have risen by 7 per cent, reflecting the fact that more people are on the dole than this time last year. Income tax and capital gains tax have also fallen, by 0.5 per cent and 10.4 per cent respectively.

The OBR admitted today that it was likely that its forecasts from March for growth in corporation tax receipts over the year would turn out to be incorrect, but it stressed that it was still “too early” to judge whether its overall public borrowing prediction for 2012-13 would turn out to be wrong.

A Treasury spokesman said that the Government remained committed to its deficit reduction plan and added that “today’s numbers emphasise how risky it would be to deliberately increase borrowing”.

However Labour’s Shadow Chief Secretary to the Treasury, Rachel Reeves, said: “This is a damning indictment of a Chancellor who promised to secure the recovery and get the deficit down. His failed plan has delivered the exact opposite - a double dip recession which is leading to soaring borrowing. What more evidence does the Government need that their plan has failed and they need to change course?”

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Attenborough with the primates
tvWhy BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
News
Campbell: ‘Sometimes you have to be economical with the truth’
newsFormer spin doctor says MPs should study tactics of leading sports figures like José Mourinho
Sport
football
Life and Style
Agretti is often compared to its relative, samphire, though is closer in taste to spinach
food + drink
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
News
Kelly Osbourne will play a flight attendant in Sharknado 2
people
News
Down-to-earth: Winstone isn't one for considering his 'legacy'
people
News
The dress can be seen in different colours
i100
Sport
Wes Brown is sent-off
football
Voices
Lance Corporal Joshua Leakey VC
voicesBeware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Life and Style
Alexander McQueen's AW 2009/10 collection during Paris Fashion Week
fashionMeet the collaborators who helped create the late designer’s notorious spectacles
2015 General Election
May2015

Poll of Polls

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Bookkeeper / Office Co-ordinator

£9 per hour: Recruitment Genius: This role is based within a small family run ...

Recruitment Genius: Designer - Print & Digital

£28000 - £32000 per annum: Recruitment Genius: This Design and marketing agenc...

Recruitment Genius: Quantity Surveyor

£46000 per annum: Recruitment Genius: This property investment firm are lookin...

Recruitment Genius: Telesales / Telemarketing Executive - OTE £30k / £35k plus

£18000 - £35000 per annum: Recruitment Genius: This company specialises provid...

Day In a Page

War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?