Money for Brussels budget fuels sharp rise in public borrowing

EU payment in December confounds expectations of fall in UK monthly deficit

Families have paid an additional £1,800 in VAT since it was raised on January 4 2011 (Getty Images)

Public borrowing figures from December delivered a nasty surprise yesterday as they revealed a large, unexpected hit from European Union budget contributions.

Headline borrowing in the month was £13.1bn, well above the £10.3bn in December 2013, with the extra damage largely inflicted by a £2.9bn payment to the European Union. The consensus of City analysts had been for £9.7bn of borrowing in the month.

The overshoot largely reflected the extra contributions due to Brussels as a result of the statistical revisions of the size of the UK economy over the past decade. The Treasury stressed that the contribution is an accounting charge, with no money changing hands, and that it ultimately expects to recoup around £800m of the outlay over the coming years. “This is simply an accounting exercise and there has been no change to the final agreement on the additional EU contribution made in November last year,” said a spokesperson.

The Office for Budget Responsibility (OBR) expects the net effect of all the EU budget contribution adjustments to be £900m over 2014-15 and 2015-16 together.

From April to December public borrowing came in at £86.3bn, down £100m on the same period in the previous year. Analysts are expecting a big jump in self-assessment income tax revenues in January to bring the 2014-15 deficit down year on year.

But some in the City expressed concern. “December’s public finance figures showed that the pace of deficit reduction remains very slow given the economy’s recent strength, and so cast doubt over whether the much bigger planned reductions in borrowing in future years will be achieved,” said Samuel Tombs of Capital Economics.

“January will tell us a lot about whether George Osborne’s latest borrowing forecasts are veering far off course already,” said Rob Wood of Berenberg bank.

The national debt rose to £1,483.3bn in December, equivalent to 81 per cent of GDP. Tax receipts were up by 2.3 per cent on the same month last year, while expenditure was 5 per cent higher (reflecting the EU contribution). VAT receipts were down around 1 per cent, while income tax and corporation tax rose 3 per cent and 10 per cent respectively. In December the OBR forecast that total receipts for 2013-14 would rise by 3.2 per cent to £611.4bn. So far in this financial year, receipts are up 2.3 per cent.

Day-to-day government spending is running 2.1 per cent higher than last year, versus the OBR forecast of 1.4 per cent. For the full 2014-15 financial year, the official forecaster said last month that the deficit would fall to £91.3bn, from £97.3bn in 2013-14.

“Over the last nine months borrowing has not fallen as quickly as the OBR is expecting for the year as a whole, but there are a number of reasons to think its forecast will still prove correct” said Soumaya Keynes of the Institute for Fiscal Studies, citing the self-assessment income tax receipts expected this month.