Borrowing still a 'problem' for George Osborne

The underlying health of the public finances will remain problematic for the Chancellor despite an expected improvement in Government borrowing, experts warned today.

Public sector net borrowing, excluding financial interventions such as bank bailouts, is expected to drop tomorrow to £13.9 billion for September, compared to £14.4 billion in the same month last year.

A slight improvement in overall economic activity in September will have helped tax receipts despite mounting pressure on the public purse as Government spending, driven up by higher benefits, still outweighs tax receipts.

Howard Archer, chief UK and European economist at IHS Global Insight, said the Chancellor faces a "problematic" autumn statement in December as borrowing looks set to overshoot the £120 billion target for 2012/2013 by at least £15 billion.

He said: "The Chancellor will be desperately hoping that the UK can start showing sustained growth which would at least help the public finances improve over the coming months and help combat calls for easing back on the austerity."

The Chancellor is now widely expected to announce in his autumn statement that the Government will be unable to start bringing down debt as a percentage of GDP in 2015/16.

The chances of this happening were heightened last month after Bank of England Governor Sir Mervyn King effectively endorsed such a move - on condition the global economy was growing slowly.

If Mr Osborne sticks to the debt target, he will be faced with the unpopular decision of announcing potentially large tax rises and further spending cuts.

Government borrowing remained unchanged in August at £14.4 billion as total tax receipts increased 1.8% to £41.4 billion and total expenditure rose by 2.5% to £52.5 billion.

In the first five months of the financial year, the public finances were worse year-on-year due to economic contraction hitting tax revenues.

Stripping out the one-off impact of the transfer of £28 billion of assets from the Royal Mail's pension funds, public borrowing was £59 billion, up from £48.4 billion in the corresponding period in 2011/12.

PA