Pressure on Chancellor grows after surge in public borrowing

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hancellor George Osborne’s deficit-busting plans were under strain last night after official figures revealed a larger-than-expected surge in government borrowing.

Public sector net borrowing, excluding financial interventions such as bank bailouts, was £17.9bn in May, up from £15.2bn the previous year, the Office for National Statistics (ONS) said.

City analysts had expected borrowing of £15.7bn.

The jump was driven by a plunge in income tax receipts and a rise in welfare benefits, underlying the impact of the double-dip recession on the public purse.

Some economists warned that the Chancellor was already on course to significantly overshoot his full-year borrowing target of £120bn, while others said the country’s prized AAA credit rating was under threat.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “The Chancellor desperately needs the economy to quickly return to growth, or else he faces suffering a significant shortfall on his public finance targets and a growing threat to the UK’s AAA credit rating which is so prized by the government.”

But the Treasury insisted that it was too early in the financial year to draw conclusions about the year as a whole.

A spokesman said: “The Government is committed to dealing with the deficit, which will help keep interest rates lower for longer and support millions of families and businesses across the country.”

Mr Osborne is in the process of rolling out a series of tough austerity measures in a bid to cut the budget deficit, which include billions of pounds of spending cuts and hundreds of thousands of public sector job losses.

He says the country’s gold-plated credit rating, which is being used to back lending schemes for businesses and households, is protected by the government’s commitment to austerity.

But the economy fell back into recession in the first quarter of the year, which has significant implications for tax revenues, while high levels of unemployment are increasing the burden on the state.

Yesterday’s figures showed income tax falling by 7.3 per cent to £9.6bn, while spending on social benefits rose by 11.7 per cent to £16.3bn. Total government spending was 7.9 per cent more in May at £55.1bn, while total tax receipts only rose by 1.6 per cent to £38.7bn.

Vicky Redwood, chief UK economist at Capital Economics, said: “The main problem remains a sharp slowdown in tax receipts. And with the economy probably still in recession, receipts are likely to remain weak.

“The combination of worsening public finances and renewed recession is likely to intensify calls for the Government to change tack on its austerity programme.”

In a further blow to Mr Osborne’s hopes, total borrowing for the last three financial years was revised upwards due to methodology changes.

Total borrowing, excluding financial interventions, in 2011/2012 was revised up by £3.2bn to £127.6bn, above the £126bn target for that year.

Net debt excluding financial interventions now stands at £1.01 trillion, compared with £921.3bn last May.

Debt as a percentage of gross domestic product – a broad measure for the total economy – hit 65 per cent in May, up from 61.3 per cent last year.

April’s borrowing figures were flattered by a one-off £28bn lift from the value of assets transferred from the Royal Mail pension plan.

But excluding this one-off impact, total borrowing for the current financial year stands at £28.4bn.