Surprise surge in borrowing dents hopes of repairing deficit

Worst August for public finances since 2012 as tax receipts fall and spending rises

The Chancellor’s attempts to repair the UK’s deficit have suffered a setback as a surprise surge in borrowing put him in danger of overshooting the target set by the fiscal watchdog, the Office for Budget Responsibility.

The worst August for the public finances since 2012 showed a deficit of £12.1bn – far worse than last year’s £10.7bn and well above the £9bn forecast by City economists. The damage was done by falling receipts from corporation and income tax, as well as by a rise in spending by both central and local government.

Although borrowing for the April to August period is still more than 10 per cent down on the same period last year at £38.4bn – the lowest since 2008 – economists warned that the Chancellor has far less room to hit the £69.5bn borrowing target for the financial year overall set by the OBR.

Investec’s chief economist, Philip Shaw, said: “If the public finances were to remain on this course the deficit would fall to £79bn this year, below 2014/15 but missing official forecasts at July’s Budget.”

He added: “Our judgement is that it is a little premature to be fretting over the public finances given that growth remains solid, private sector pay is strengthening and consumer spending is robust. But while considerable progress has been made in reducing borrowing, the job to consolidate the public finances is not finished yet and perhaps these figures are a timely reminder.”

Liz Martins, an economist at HSBC, said: “The government made a strong start to the current fiscal year, in terms of the public finances, but the pace now seems to be faltering. Over the first five months of the fiscal year, borrowing is down, but over the last three months, it is up.”

The signs of weakness come as George Osborne scours Whitehall for an extra £20bn in departmental savings before his next spending review on 25 November. The Chancellor is aiming to achieve the first overall surplus since 2001 by 2019/20.

The detailed figures showed income tax receipts down £400m, or 3.5 per cent, to £11.9bn, because the figures a year earlier were swollen by late payment of self-assessment income tax. Receipts overall slipped £300m to £47.5bn. But overall spending swelled to £55.7bn, thanks to a £1bn rise in departmental spending and higher pension payments.

Local government borrowing was also revised £2.4bn higher after updated figures from the Department for Communities and Local Government (DCLG).

The OBR hinted in its commentary on the public finances that it could raise borrowing estimates in its next assessment, due to be published alongside the spending review in November.

The watchdog said: “Higher borrowing in August and upward revisions to borrowing (particularly from local authorities) for the April to July period mean that year-to-date borrowing is now only £4.4bn lower than a year ago over the first five months.

“There is some evidence that local authority borrowing could be higher than assumed in the July economic and fiscal outlook, given the latest DCLG information on local authority current spending. We will be looking at this carefully in our next forecast.”