Last updated: December 21, 2012 7:36 pm

Blow for Osborne as borrowing rises

George Osborne suffered a double blow on Friday after it emerged that a severe shortfall in income tax revenue pushed the public finances deeper into the red last month, and growth was marginally weaker in the third quarter.

The poor data on the public finances complicate the chancellor’s ambition to show government borrowing falling this financial year.

Government current budget balance

Government current budget balance

In official figures that will depress the Treasury just before the Christmas break, the Office for National Statistics reported that public sector net borrowing in November was £17.5bn, an increase on the level of borrowing from last year.

More worrying for the chancellor is that the main cause of higher borrowing is disappointing income tax receipts – the government’s most important revenue source – and so cannot be put down to odd timing of government expenditure, which is variable across the financial year.

Rowena Crawford, of the Institute for Fiscal Studies, said: “Today’s [Friday’s] figures confirm that receipts from many of the major taxes continue to grow slowly, with receipts from income tax, national insurance and capital gains tax being only 0.5 per cent higher so far this year than they were over the same months last year.”

The Office for Budget Responsibility acknowledged that receipts growth would need to pick up – and spending growth slow – in the final four months of the year for its government borrowing forecast to be met.

With data for eight months of the financial year already in, the deficit between day-to-day current expenditure and tax revenues is £85.5bn, an increase of £11.7bn over the same months in 2011-12.

The financial year comparison of public sector net borrowing is distorted by the one-off gains of the transfer of Royal Mail pension assets on to the books. Excluding those receipts, the deficit is £8.3bn higher than last financial year.

In his Autumn Statement, Mr Osborne emphasised the OBR’s forecast that borrowing would fall in 2012-13 on any basis of calculation.

The chancellor must now rely on much stronger receipts in the crucial month of January, when self assessment is paid, and on the auction of 4G spectrum licences which will contribute a one-off sum, forecast at £3.5bn.

Chris Williamson, of Markit, said the figures were so bad that in normal years the full-year target for borrowing would be “utterly unachievable”, but one-off elements flattering the public finances might allow Mr Osborne to claim borrowing is falling.

Meanwhile, the ONS’s latest gross domestic product figure for the third quarter showed the economy grew 0.9 per cent, not 1 per cent as earlier estimates had suggested.

Growth in the dominant services sector, which makes up more than three-quarters of the UK economy, and manufacturing, which accounts for just over a 10th of GDP, was weaker than thought. Consumers also spent less.

Chuka Umunna, shadow business secretary, said: “The ONS confirms our economy is bumping around the bottom and yet Cable and Osborne persist with their failing plan while others suffer.”

Tax revenues in November were particularly depressed in the non-PAYE elements of income tax. Total income tax revenues were down 12.3 per cent this year even though money handed over to HM Revenue & Customs in respect of PAYE was similar to last year.

Other tax revenues appear to be more buoyant. Value added tax revenues were up 5.8 per cent and national insurance contributions rose by 5 per cent, but the disappointments on income tax more than offset these stronger receipts.

Additional reporting by Jim Pickard.

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