Rise in Government spending blows hole in borrowing targets

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Rising Government spending blew an unexpected hole in the public purse in July, official figures have revealed.

The Office for National Statistics (ONS) said the state had to borrow a net £488m – the first time in three years there was a deficit rather than a surplus in July.

The public coffers usually show a surplus in July due to big tax payments by companies and individuals, but these were outstripped by an increase in spending by central government departments, it said.

July’s deficit was much worse than economists’ average prediction of a £2.5bn surplus, and they said the figures suggest Britain’s improving economy has yet to boost the state’s finances.

But the Treasury insisted the economy is moving from “rescue to recovery” after higher tax receipts were also reported.

The ONS said public sector net borrowing, stripping out distortions from bank bailouts and quantitative easing (QE) cash, swung £1.3bn into the red in July from an £823m surplus a year earlier.

The figures also showed underlying public sector net debt as a proportion of the UK’s gross domestic product hit a record for July at 74.5 per cent.

Martin Beck, of consultancy Capital Economics, said: “While signs of economic recovery should eventually feed through into an improvement in the public finances, it looks like the Chancellor will have to wait a while yet.”

Once a transfer of around £400m of QE cash was included, public sector net borrowing was £62m in July – the Government’s preferred measure. But this was still £885m higher than the £823m surplus a year earlier.

The ONS said the higher spending was spread across departments, adding that the Treasury expects this to be revised lower in coming months.

A Treasury spokeswoman said: “Strong tax receipts in July confirm that the economy is moving from rescue to recovery.

“There is still a long way to go as the UK recovers from the biggest economic crisis in living memory, and the Government is sticking to the economic plan that has already cut the deficit by a third and enabled the private sector to create over 1.3 million new jobs.”

The ONS figures showed total tax receipts excluding QE cash were 3.4 per cent higher year on year at £54.1bn in July, helped by increases in VAT sales tax, income tax, National Insurance contributions and stamp duty on home purchases.

But corporation tax receipts dipped to £7bn from £7.1bn a year earlier, despite increasing signs of growth in the economy.

Central government spending rose by four per cent to £51.2bn, which the Treasury said was inflated by transfers to several departments.

Total public sector net debt, stripping out the temporary
cost of bank bail-outs, stood at £1.19 trillion in July, up 7.3
per cent from £1.11tn a year earlier.

Chris Leslie, Shadow Financial Secretary to the Treasury, said: “Another month of disappointing figures raises very serious concerns that borrowing continues to be way off track.

“Instead of the expected surplus in what is usually a good month for the public finances, Government borrowing increased, with public finances £1.3bn worse this July than last.

“Because of his continued complacency, George Osborne is failing to get the deficit down because he has failed to boost living standards and we have seen three years of almost flat economic growth.

“He’s borrowing billions more than planned simply to pay for the costs of his economic failure.

“And his promise to balance
the books by 2015 is now in tatters.”