UK economy: George Osborne’s pledge to balance books by 2015 ‘in tatters’
PRESSURE is mounting on George Osborne to rethink his economic strategy after official figures revealed an unexpected rise in government borrowing.
The Chancellor’s debt-reduction plans were dealt a severe blow after public-sector borrowing to bridge the gap between spending and revenue reached £600 million last month.
The latest figures dashed City predictions of a £2.5 billion surplus for July and led opposition politicians to claim that the government’s pledge to balance the books by 2015 was “in tatters”.
The poor performance was especially surprising, given that July is normally a strong month for the Treasury when it comes to income from taxes. There was a surplus of £2.8bn in the same month last year.
The increase in borrowing intensified the calls on the Chancellor to change his economic strategy, which is based on attempting to cut the UK’s deficit through austerity measures. The figures led to some experts predicting that the UK government could end up borrowing £30bn more than last year, in defiance of official forecasts which had predicted that borrowing would actually fall this year.
The Office for Budget Responsibility (OBR), the official UK economic forecaster, said there was still “significant uncertainty” about the outlook for borrowing this year.
The figures showed that, four months into the financial year, the government has borrowed £44.9bn – £9.3bn higher than the same period in 2011. That excludes banking interventions and the one-off boost in April from a transfer of Royal Mail pension assets to the public sector.
In total, public-sector net debt was above £1 trillion, compared with £940bn a year ago, and now represents 65.7 per cent of the UK’s GDP, up from 61.8 per cent last year.
Shadow Treasury chief secretary Rachel Reeves said Mr Osborne should now accept that his economic strategy had failed and he should change course.
“This is a damning indictment of a Chancellor who promised to secure the recovery and get the deficit down,” she said.
“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?
“George Osborne’s decision to raise taxes and cut spending too far and too fast has choked off the recovery and, as a result, the government’s pledge to
balance the books by 2015 is now in tatters.
“Unless the Chancellor takes urgent action now, he will end up not only borrowing billions more to pay for economic failure, but he risks causing long-term damage to our economy, too.”
The SNP claimed the figures were damaging to Mr Osborne’s credibility and undermined arguments against independence.
Stewart Hosie, the Treasury spokesperson, said: “Each passing day sees George Osborne’s failed Tory economic policies push the UK economy further into decline. No wonder even his closest supporters are now abandoning him.
“It is clear to everyone except Mr Osborne that his austerity agenda has failed, but the Chancellor continues to bury his head in the sand and ignore the chorus of calls for capital investment to boost growth.
“Having displayed so little grasp of the current economic situation, why on earth would any of us take seriously his unfounded scare stories about the prospects of an independent Scotland?
“There is no denying the facts – over the five years to 2010-11, Scotland was in a stronger financial position relative to the UK as a whole by a total of £8.6bn – that’s over £1,600 for every man, woman and child in Scotland.
“And last year Scotland paid 9.6 per cent of UK taxes, but received only 9.3 per cent of expenditure.
“There is absolutely no doubt that an independent Scotland – backed by control of our own vast resources, which most countries can only dream of – would be considerably better off.”
The government wants to trim borrowing in 2012-13 to £120bn, excluding the one-off £28bn boost from the transfer of the Royal Mail pension fund. That compares with a figure of £125bn last year, which was revised down by £700m.
The figures released by the Office of National Statistics revealed that an increase in government spending of 5.1 per cent was accompanied by a 0.8 per cent drop in receipts, which was driven by a drop in corporation tax.
The temporary closure of the Elgin gasfield in the North Sea following a leak on a Total platform was a major factor behind the fall in corporation tax revenue.
Vicky Redwood, UK economist at Capital Economics, said: “July’s UK public finances figures continue the deterioration seen over the past few months.
“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.
“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 is in the process of rolling out billions of pounds of spending cuts and hundreds of thousands of public-sector job losses in an effort to slash the budget deficit.
But the plans have been hit by the UK’s return to recession, which is hurting tax revenues, while high levels of unemployment are increasing the burden on the state.
Social benefit payments rose 6.2 per cent to £16bn in the month – more than expected – while a fall in corporation tax drove a 6 per cent fall in taxes on income and wealth.
Despite the fall in corporation tax, income tax, National Insurance and VAT held up.
A Treasury spokesman said: “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.”