More, deeper cuts ahead as economic woes mount

Cabinet ministers have been warned to prepare for further sweeping budget cuts extending to 2016 as new figures showed another leap in public sector borrowing.

George Osborne told ministers attending yesterday’s Cabinet that they would have to do “more for less” and must start identifying savings across all areas of their departments ahead of next year’s Comprehensive Spending Review.

The warning came as it emerged that the Government borrowed £15.4bn last month – £500m more than the same month the previous year. More bad news is expected later this week with the publication of official growth figures, which are expected to show that output contracted in the final quarter of 2012.

Acknowledging how tight things are, the outgoing Bank of England Governor Sir Mervyn King said last night that Britain’s 20-year-old inflation-targeting regime had “come of age” and should be reviewed.

Sir Mervyn’s comments pave the way for the first major overhaul of the Bank’s inflation target since it was granted independence in 1997.

Although a triple-dip recession would require two consecutive months of negative growth, some economists fear that the recent spell of bad weather has made this more likely. All three of the major credit ratings agencies now have the UK’s coveted AAA rating on negative outlook.

Acknowledging the severity of the economic situation, the Chancellor told colleagues that he expected them all to work with the Cabinet Office’s Efficiency and Reform Group to identify where they could merge functions, services and buildings to reduce costs.

“The Government has made very clear that there will be further squeezes on departmental spending, said David Cameron’s official spokesman. “The focus at Cabinet today was on doing as much as we can through service reform and efficiency, but there is an acknowledgment that the Government will have to continue to make difficult decisions.

The Prime Minister’s spokesman said: “There was agreement around the Cabinet table that, although the decisions that are going to have to be taken are difficult, they will have to be made.”

Health, education and foreign aid spending will continue to be protected but the departments concerned will still be expected to find administrative savings in their budgets.

Asked whether cuts to frontline services were inevitable, the spokesman said: “There is a sense across Government that there are further opportunities for big public service and back-office service reforms. It is very important that these are explored to the full.”

Yesterday’s borrowing figures were worse than those pencilled in by economists. It comes after an unexpected increase in November, when borrowing rose to £17.5bn, up £1.2bn from last year, after tax receipts were dented by lower energy company profits.

Within the December figures, the picture was much the same as previous months, with Government spending outstripping tax receipts. Total expenditure was up 5.4 per cent, with tax receipts up just 3.6 per cent in the month.

Public sector borrowing for the year to date is £106.5bn, excluding a one-off £28bn boost from the transfer of the Royal Mail pension fund into Treasury ownership, which is 7.3 per cent higher than the same period last year.

Martin Beck, UK economist at consultancy Capital Economics, said December’s public finance figures confirmed that the Government’s fiscal consolidation plans were still off track.

He expects borrowing for 2012/13 to come in at around £113bn, £5bn above the tax and spending watchdog’s forecast of £108bn.

ING economist James Knightley added: “The question is how long the UK can hold on to its AAA status. With the US and France having been downgraded by one ratings agency in the past couple of years, another disappointing UK borrowing number and a widely expected contraction in GDP on Friday will intensify the threat of the UK suffering the same fate.”

A Treasury spokesman said the figures underlined that the recovery in the Government’s finances was taking time but the economy was healing.

However, Labour’s shadow Chief Secretary Rachel Reeves said: “David Cameron and George Osborne’s economic plan is hurting, but it’s not working. Their failure on jobs and growth means they are now failing on the one test they set themselves – to get the deficit and debt down.”