Fall in government borrowing raises pay fears

The Government's finances were in such unexpectedly good shape last month that many City experts are saying the Iron Chancellor will keep borrowing below his pounds 11bn target this year. Diane Coyle, Economics Editor, assesses if the figures mean the government will have some extra leeway on public sector pay.

New figures yesterday showed that the shortfall between government spending and revenue was pounds 1.1bn in August, following a surprisingly big surplus in July. The Public Sector Borrowing Requirement (PSBR) in the first five months of the financial year has added up to pounds 6.6bn excluding one-off privatisation proceeds, less than half the total at the same stage last year.

Economists in the City, who scrutinise the PSBR closely for clues about how much money the government will need to raise by selling gilts to the financial markets, described the August figure as "spectacularly good".

Part of the explanation was the receipt of an extra pounds 1.4bn in tobacco duties last month, simply reflecting the timing of the July Budget. However, thanks to the buoyant economy, total tax receipts so far this financial year have been nearly 8 per cent higher than last year.

More significant is the fact that expenditure by government departments is pounds 1.4bn lower than at the same stage last year. If spending continued to fall at the same pace, this year's PSBR would be closer to pounds 4bn than the pounds 11bn target.

This is unlikely as one-offs such as the sale of the MoD married quarters and the Housing Corporation's loan book have shrunk expenditure artificially this year. Even so, a combination of falling unemployment and tight control mean government spending might undershoot the plans published in the Budget.

Kevin Darlington, an economist at investment bank ABN-Amro, agreed. "It will still be a hell of a task to keep departmental spending down like this. But there could be extra in the kitty for next year's public sector pay bill."

On the day when Alistair Darling, chief secretary to the Treasury, insisted the government would be "fair but firm" on pay claims, the borrowing figures suggested that it might be in a position to offer more to high-profile groups like nurses, doctors and teachers, according to analysts.