Borrowing rise puts Chancellor on the spot

Economy: PSBR figures expose fragile state of finances as Bank Governor tells MPs of his fears

The fragile state of the government's finances was exposed yesterday by figures showing that its borrowing, excluding privatisation proceeds, was higher in the first three months of this financial year than last year. It was an embarrassing blow to the Chancellor's assertion that the shortfall between revenue and spending remains on a downward trend.

The message was rubbed home by Eddie George, Governor of the Bank of England, who told MPs on the House of Commons Treasury committee yesterday that the slippage in government borrowing made him "uncomfortable".

"If the Chancellor is comfortable with that it must be because he knows more about it than I do," he said.

Yesterday's borrowing figures also led to a clash between the Prime Minister and Labour leader Tony Blair in the House of Commons on the eve of today's debate on the economy.

Mr Blair asked Mr Major: "Do you recall promising the country at the last election that you would balance the Budget? How do you square that with today's further disastrous borrowing figures?" Mr Major replied that government borrowing would continue to fall.

Borrowing totalled pounds 3.6bn in June, the third month running where the gap between revenues and spending increased. The public sector borrowing requirement (PSBR) was pounds 12bn in April-June, excluding privatisation proceeds of pounds 1.3bn. This compares with pounds 11.3bn in the same months last year.

Tax revenues are now growing in line with the Treasury's new, lower forecast, although subdued due to the income tax cut that took effect in April. However, government spending has run ahead of plans so far this financial year. Spending by departments has grown 3.3 per cent year-on-year, compared with the Treasury target of 1.8 per cent.

The Treasury said June's figure reflected the bunching of interest payments on government debt into June and December, following the introduction of the gilts strip market. This contributed an extra pounds 800m to last month's borrowing total. It had also expected more VAT receipts to be brought forward as a result of changes to the payment-on-account scheme for big payers.

Most commentators said the disappointing PSBR figures would not necessarily derail tax cuts.