Double blow for economy as tax deficit meets fewer orders

The Office for National Statistics (ONS) said public sector finances, excluding bank bailouts, showed a deficit of £600m in July, when economists had expected a £2.5bn surplus.

Total receipts fell 0.8 per cent, with less corporation tax income, while Government spending increased 5.1 per cent.

This was only the third time in 15 years the Government has not recorded a surplus in July, when many companies pay the year’s first instalment of corporation tax.

Social benefit payments rose 6.2 per cent to £16bn, while taxes on income and wealth fell six per cent. Public sector net debt was above £1 trillion, up from £940bn last year. In a further blow, the ONS increased its borrowing figures for April to June by £1.4bn.

Meanwhile a survey by the CBI business body revealed 36 per cent of firms said their order books were weaker than normal in the three weeks to August 15, with demand for consumer goods particularly badly hit.

Export order books showed a similar decline as the eurozone debt crisis hurt overseas demand.

This was the worst performance since December and below the long-run average, fuelling fear the UK will struggle to emerge from the longest double-dip recession in 50 years in the third quarter of 2012.

Economists fear the Government will miss its target to reduce the deficit for 2012/13 by £5bn adding to concerns that the UK’s AAA credit rating may be at risk.

Shadow Treasury Chief Secretary Rachel Reeves said: “George Osborne’s decision to raise taxes and cut spending too far and too fast has choked off the recovery and as a result the Government’s pledge to balance the books by 2015 is now in tatters.”

A Treasury spokesman said it was too early to judge whether finances would be blown off course for the full-year.