Increased borrowing leaves George Osborne cuts plan in tatters

Public sector net borrowing, excluding financial interventions, such as bank bailouts, was £14.4 billion in June, up from a revised £13.9bn the previous year, the Office for National Statistics (ONS) said yesterday.

While tax revenues increased in the month by 3.6 per cent to £40.9bn, total government spending only dipped by less than 1 per cent to £52.4bn.

The weak figures come after the International Monetary Fund (IMF) said the Chancellor should be braced to slow the pace of his tough austerity measures if the economy fails to come to life.

The Chancellor wants to trim borrowing in 2012-13 to £120bn, excluding a one-off boost from the transfer of the Royal Mail pension fund into Treasury ownership. This compares with borrowing of £125.7bn in the last financial year, which was revised down to below the Office for Budget Responsibility’s (OBR) forecast of £126bn.

Mr Osborne is in the process of rolling out billions of pounds of spending cuts and hundreds of thousands of public sector job losses in a bid to slash the budget deficit.

However, the UK 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. This was reflected in June’s public finance figures, which showed a 0.1 per cent drop in income tax to £10.8bn and a 3.2 per cent rise in social benefits, including unemployment claims, to £15.4bn.

A Treasury spokesman said: “It is too early in the financial year to draw conclusions about the year as a whole.

“This is volatile data and is prone to revision – borrowing for last year has been revised again and is now estimated to be below the OBR’s forecast.”

Net debt excluding financial interventions now stands at £1.04 trillion, compared with £944.6bn last June.

Debt as a percentage of gross domestic product (GDP) – a broad measure for the total economy – hit 66.1 per cent in June, up from 62.3 per cent last year.

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

However, excluding this one-off impact, total borrowing for the current financial year stands at £42.9bn, compared with £38.4bn at the same stage last year.

The IMF said on Thursday that the government should ease its fiscal tightening if the recovery continues to stall.

Last week, the Chancellor and Bank of England governor Sir Mervyn King launched an £80bn lending scheme to stimulate economic growth – but ministers insisted the move was not a “Plan B”.

James Knightley, economist at ING Bank, said: “It is clear that the recession is leading to a worsening of the UK’s underlying fiscal position and raises more question marks over the effectiveness of the government’s austerity measures.”