Borrowing crisis limits pre-Election tax cuts

The Coalition’s plan to cut the deficit are in serious trouble, as official figures showed public borrowing over the first half of 2014/15 running a full 10 per cent higher than a year earlier.

Borrowing in September alone was £11.8bn, more than 15 per cent up on the same month last year, according to the Office for National Statistics. Economists had expected borrowing for the month to come in at just £10.5bn.

“With borrowing cuts missing in action, the Chancellor could face a testing time in the run-up to the election” said Robert Wood of Berenberg Bank. Other analysts pointed out that the weak public finance figures meant it would now be much harder for George Osborne to announce any tax cuts ahead of next May’s general election. “This gives him little scope to announce any major sweeteners” said Howard Archer of IHS Global Insight.

Tax receipts last month were only 3.1 per cent higher than a year earlier, despite the recovery. But the bigger disappointment was on Government spending, which was up 3.7 per cent. Social benefit payments were 5.4 per cent higher, reflecting higher pension payments.

Robert Chote, head of the Government’s fiscal watchdog, highlighted last week that income tax receipts were falling short of expectations, despite a surge in employment. The discrepancy suggests many of the new jobs being created in the recovery are low-skilled and relatively poorly paid, according to some economists.

Others culprits are likely to be successive hikes in the tax-free personal allowance by the Coalition and the fact that many high earners shifted their incomes into the previous financial year to take advantage of the cut in the higher rate of income tax.

Labour called the figures “a serious blow” to the Chancellor and pointed out that in his original plans in 2010 Mr Osborne pledged to eradicate the current budget deficit by the end of this Parliament. “Stagnating wages and too many people in low-paid jobs are leading to more borrowing” said Chris Leslie, the shadow Chief Secretary to the Treasury.

In March, the Office for Budget Responsibility projected full-year borrowing, excluding financial interventions and various one-offs, for 2014/15 of £86.6bn, down 12 per cent from the 2013/14 deficit. But with six months of the financial year gone the Government is already more than halfway towards this target, having borrowed £57.3bn, according to the ONS.

“Borrowing would have to be a whopping 37 per cent lower than last year in the remaining six months of the fiscal year for the annual total to match the OBR’s forecast”, said Samuel Tombs of Capital Economics. The OBR itself conceded that such a turnaround was now unlikely. “It is looking less likely that the full-year receipts growth forecast will be met” the fiscal watchdog said in its regular commentary.

The ONS also said that the national debt rose to £1.451 trillion in September, equal to 79.9 per cent of GDP.