Recovery faltering as public borrowing hits record

Figures show that public sector borrowing hit £15.9bn last month, up £1.9bn on July, leaving the Government in danger of exceeding the £122bn full-year target set by the Office for Budget Responsibility (OBR).

The warning comes on top of one earlier in the week from the International Monetary Fund (IMF) which cut its UK growth forecast in line with other European, American and Japanese projections and expressed concern that world markets were entering a “dangerous new phase”.

Last night the IMF said that “political weakness” was hampering the eurozone’s recovery, adding to the sense of gloom on the financial markets yesterday.

The damning assessment was issued by the Office for National Statistics (ONS) on the same day that Deputy Prime Minister Nick Clegg warned of a “long, hard road ahead” during his keynote speech to the Liberal Democrat party conference.

However, despite the gloomy outlook Mr Clegg signalled that there would be no altering of the coalition’s austerity drive and vowed to press ahead with the strategy of deep spending cuts.

This view tallied with that of a Treasury spokesman who flatly denied a shift in position. “We have our spending plans and we are sticking to them,” he said.

However, the news put Chancellor George Osborne under increasing pressure from politicians and business leaders.

Last night the Treasury was quick to reject speculation that a further £5bn would be pumped into the faltering economy and denied that another round of quantitative easing was imminent to avoid a double-dip recession.

This came despite Energy Secretary Chris Huhne saying a further round of quantitative easing would be “sensible” given the “flatness” of growth.

The Government said more was borrowed in August because tax receipts dropped unexpectedly and expenditure rose. The Treasury countered that the OBR’s statistics were based on estimates that the UK’s economy will grow by 1.7 per cent this year, a figure already rejected as too optimistic.

Total borrowing in the first five months of the financial year now stands at £51.5bn after the ONS made a series of downward revisions. There was a £2.2bn downward revision for the first quarter of 2011 and a reduction of £2.4bn for July, prompting cautious optimism from the Treasury that targets would be met.

A spokesman said: “These figures also include a welcome and substantial downward revision to borrowing so far this year and to overall borrowing last year.”

However, Chris Williamson, chief economist at financial information services company Markit, said spending in the financial year to date equals cuts of only £800m per month, compared to a need to cut spending by £1.7bn per month if the Government is to hit its yearly target.

He said: “There seems little hope that the Government will hit its spending targets this year, as slower growth means less tax revenues and higher welfare spending.”

But David Kern, chief economist at the British Chambers of Commerce (BCC), said the fiscal strategy was still largely on course and it is “important that the Government perseveres with the job of reducing the deficit and stabilising Britain’s public finances”.

He added: “Meanwhile, to reduce risks of a setback, the MPC (Bank of England Monetary Policy Committee) must maintain low interest rates and give active consideration to increasing the QE programme.”

However, Labour Treasury spokeswoman Angela Eagle said the news confirmed her party’s worst fears.

“If you cut spending and raise taxes too far and too fast, you get into a vicious circle. That’s because if you choke off the recovery and put tens of thousands of people on the dole, claiming benefits rather than paying taxes, then it’s harder to get the deficit down.

“Even before these figures were released, the Government was already set to borrow £46bn more over the coming years than they planned, because of the slower growth and higher unemployment George Osborne’s failed policies have delivered.”