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The Treasury is pinning its hopes of hitting its latest forecasts for government borrowing on bumper January tax receipts and continued high oil prices.

Its reliance on City bonuses and oil company profits was cemented after November’s public finances showed the highest level of borrowing in that month and the worst public sector deficit in the first eight months of the year.

In the 2007-08 financial year to November, public sector net borrowing stood at £36.2bn – worse even than 1993-94, when public borrowing rose to a record full-year high of £51.1bn.

Economists said the outlook was likely to be better than in the early 1990s, when the Conservative government was forced to introduce two heavily tax-raising Budgets, partly because the deficit then represented nearly 8 per cent of gross domestic product and partly because January has become a more important month for tax revenues.

But public borrowing as a share of national income is now on course to exceed the European Union Maastricht treaty limit of 3 per cent, and is near the bottom of the league of advanced countries in 2007. Even before the latest deterioration, the Organisation for Economic Co-operation and Development expected borrowing to be higher than comparable European economies. It expects Germany’s budget to be in balance and the deficits in Italy and France to be 2.2 per cent and 2.5 per cent of GDP respectively.

John Hawksworth, an economist at PwC, the professional services firm, said: “The chancellor is likely to be playing Scrooge for some years in order to get this uncomfortably high budget deficit back under control in the medium term.”

The Institute for Fiscal Studies thought that Alistair Darling, the chancellor, had some chance of meeting his forecasts, but that would require tax revenues to be 7.5 per cent higher than in 2006-07 in the final third of the financial year. In the first two-thirds, tax revenues were only 5.1 per cent up.

Gemma Tetlow, an economist at the institute, said: “The dangers . . . are that corporation tax and income tax receipts from City bonus-
es don’t come in as strongly as the Treasury needs.”

Michael Saunders, a Citigroup economist, noted that the record budget deficit came alongside a record current account deficit. “All this looks pretty ugly: rising twin deficits and a credit crunch,” he said.

The Treasury hopes that with oil prices close to $100 a barrel, it can still count on hefty profits from the North Sea to boost revenues to dig itself out of a hole.

The government spending figures do not include loans to Northern Rock, as these are backed by the stricken bank’s assets and count as a contingent liability on the government’s books.

Copyright The Financial Times Limited 2017. All rights reserved.
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