Government borrowing 10% higher than last year

The chancellor’s plan to cut the deficit this year looks increasingly unrealistic after another jump in government borrowing in September pushed the deficit 10% higher in the first half of the year, lessening the chances of a pre-election giveaway at December’s autumn statement.

Borrowing last month was £11.8bn, £1.6bn higher than in September 2013 and more than £1bn higher than City economists had forecast, official figures showed, as the tax take failed to keep pace with government spending despite the recovery in the economy.

Tax receipts have disappointed over recent months partly due to unexpectedly weak pay growth and the increase in the personal allowance to £10,000.

In the first six months of the tax year, between April and September, borrowing was £58bn, up £5.4bn on the first half of last year, according to the Office for National Statistics.

Economists said it was looking increasingly likely George Osborne would miss his target of reducing the deficit by more than £12bn in 2014-15. Alan Clarke, economist at Scotiabank, said that if the current trend continued, borrowing would come in about £10bn above the target.

Howard Archer, chief UK economist at IHS Global Insight, said: “The chancellor is looking ever more unlikely to meet his fiscal targets for 2014/15. This means that Mr Osborne faces an awkward fiscal backdrop as he announces his autumn statement in December as the May 2015 general election draws ever nearer. This gives him little scope to announce any major sweeteners.”

The Office for Budget Responsibility, the Treasury’s official forecaster, cautioned that although there was uncertainty over government borrowing in the second half of the fiscal year, tax receipts for the full year were likely to come in below forecast.

“Factors such as weaker-than-expected wage growth, lower-than-expected residential property transactions and lower oil and gas revenues mean it is looking less likely that the full year receipts growth forecast will be met,” it said.

The Treasury will be hoping the public purse will be boosted in the later months of the fiscal year when self-employed people file their tax returns.

Frances O’Grady, TUC secretary general, said: “It’s time for George Osborne to admit he got his strategy wrong. Today’s figures show the deficit getting bigger as tax revenues dry up. Only a wages-led recovery can bring about the boost in demand that businesses need and the boost in revenue the government needs to cut the deficit and invest for the future.”

The average monthly wage for employees of FTSE 350 companies increased by 8p over the three months to September, compared with last year, according to Vocalink, which processes salary payments for more than 90% of the British workforce.

Tax receipts increased by £1.4bn in September compared with the same month last year, to reach £46bn, but over the first six months of the year receipts were £1bn or 0.4% lower than a year earlier at £287.1bn.

Government spending, however, was £10.1bn, or 3% higher, over the same period at £344.1bn. Higher welfare spending, increased spending by government departments, higher debt interest payments and increased investment contributed to the rise in government spending.

The national debt reached £1.45tn in September, representing almost 80% of GDP and more than £100bn higher than at the same point last year.

Despite the surprise increase in the deficit, a spokesman for the Treasury said the “government’s long-term economic plan is working”, with the UK economy growing faster than that of its G7 peers.

He added: “We have seen stronger growth in receipts this month, but as today’s figures show, the impact of the great recession is still being felt in our economy and the public finances. At the same time, we have to recognise that the UK is not immune to the problems being experienced in Europe and other parts of the world economy.”

The poor state of the public finances makes it less likely that credit rating agencies Moody’s and Fitch will restore the UK’s AAA rating soon, according to Howard Archer. The two agencies stripped the UK of the top-tier rating last year, but Standard and Poor’s, Britain’s other big agency, retained the UK’s AAA.

Archer said: “If the UK continues to see weaker-than-expected public finances and growth falters over the coming months, there could be a renewed risk to the UK’s one remaining AAA rating from Standard & Poor’s.”