Shock rise in borrowing threatens austerity plans

The City had forecast a surplus in the public finances of £2.5bn last month, but official figures show the government was forced to borrow £600m to keep services running.

July is usually a strong month for tax receipts – there was a surplus of £2.8bn at the same time last year – but the money raised by corporation tax fell by almost 20 per cent in July while government spending rose by 5.1 per cent.

Borrowing for April to June was also revised upwards by £1.4bn, making it more likely that Mr Osborne will look for further cuts in public spending and tax rises to cut the deficit.

This is despite calls from the Labour party for the government to slow down its austerity drive and do more to stimulate growth in the economy.

‘Damning indictment’

Rachel Reeves, shadow treasury chief secretary, said: “This is a damning indictment of a chancellor who promised to secure the recovery and get the deficit down.

“His failed plan has delivered the exact opposite – a double dip recession which is leading to soaring borrowing. What more evidence does the government need that their plan has failed and they need to change course?”

The government is hoping to cut borrowing to £120bn in 2012-13, excluding the one-off £28bn boost from the transfer of the Royal Mail pension fund. It has already borrowed £45bn this financial year.

‘Massively overshoot’

Vicky Redwood, UK economist at Capital Economics, said ministers were unlikely to succeed.

“At this rate, borrowing for 2012-13 overall will massively overshoot the Office for Budget Responsibility’s forecast of £120bn excluding Royal Mail effects by over £35bn,” she said.

“And with the recovery falling well short of the OBR’s expectations, we think that the government will struggle to cut borrowing at all next year either.”

Mr Osborne’s plans have been hit by Britain’s return to recession, which has meant lower tax receipts and higher spending on benefits.

The latest figures make it harder for the government to hold on to its AAA credit rating, which can affect borrowing costs.

Austerity

When it came to power in 2010, the government had hoped to eliminate the the structural budget deficit by 2015, but the weak economy has forced it to extend its austerity programme by another two years, with Prime Minister David Cameron warning that it could last until 2020.

In July, benefits spending rose by 6.2 per cent to £16bn, while corporation tax receipts fell, largely due to the closure of the Elgin gas field in the North Sea following a leak.

A Treasury spokesman said: “Tax receipts are coming in below forecast, but this is mostly explained by the weakness in corporation tax, especially from North Sea oil production.

“The government remains committed to the credible plan we have set out to deal with Britain’s debts, and today’s numbers emphasise how risky it would be to deliberately increase borrowing.”

Total government debt is now above £1tr, compared to £940bn a year ago, and now represents 65.7 per cent of the UK’s annual output, up from 61.8 per cent last year.