Government borrowing drives Osborne off course

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The Government borrowed more than expected last month, making it look increasingly unlikely that Chancellor George Osborne can hit his challenging target of reducing borrowing substantially over this financial year.

A slowing British economy in the run-up to the referendum on Thursday and higher-than-forecast Government spending saw public sector net borrowing of £9.7 billion in May. 

Although that was the lowest figure for May since 2007 and 3.8% below a year ago, it was higher than economists’ average forecasts of £9.5 billion. 

The Office for Budget Responsibility has predicted overall net borrowing of £55.5 billion for the year to next March down from £72.2 billion in the 2014-15 fiscal year. 

Alan Clarke, head of fixed income strategy at Scotiabank said: “The Budget projected a £20 billion reduction in borrowing this year. That means that to hit the target, we need to see around a £1.7 billion reduction in borrowing each month compared with the same month a year earlier. Two months into the financial year and we are seeing borrowing up cumulatively by £150 million — higher borrowing,  not lower.”

Treasury receipts from income and corporation tax, as well as VAT were all higher than a year ago, despite worries that the economy has slowed down in the run-up to the referendum. But the Government’s total current expenditure was also higher than a year ago.

Scott Bowman of Capital Economics said: “We should take the figures for the first few months of the fiscal year with a pinch of  salt as they are often revised because they are largely based on forecast data.

“And if the UK votes to remain in the EU then growth should rebound in the second half of this year, paving the way for a more rapid improvement in the public finances. Nonetheless, the big picture is that the Chancellor has a long way to go in order to meet his fiscal forecasts.”

The total amount the Government owes (public sector net debt) has risen by £49.6 billion in the past 12 months to just more than £1.6 trillion or 84% of the country’s total economic output.

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June 21, 2016 |
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