Public borrowing rises as tax receipts fall

City A.M. Reporter
Public borrowing was higher than expected in May after income tax receipts fell and spending rose, in a sign the government may face a struggle to meet its debt reduction target as the economy weakens.

The Office for National Statistics said that public sector net borrowing excluding public sector interventions - the government's preferred measure - came in at £17.9bn last month, up from £15.1bn last May.

This was above economists' forecasts for £14.8bn and took borrowing in the fiscal year to date to £356M, compared with £24.4BN a year ago.

The cumulative figure was flattered by a one-off transfer of assets from the pensions fund of the state-owned postal service in April. Without this effect, PSNB-ex would have been 28.4 billion pounds in April and May combined.

In addition, the ONS revised up borrowing in 2011/12 to £127.6bn from £124.4bn.

The figures cast doubt over the government's ability to meet its deficit target of 92 billion pounds in the 2012/13 fiscal year, which includes the asset-transfer effect.

Britain has fallen into recession for the second time in four years, and uncertainty about the knock-on effects of the euro zone debt crisis have already forced the coalition government to admit it will take two years longer to eliminate its budget deficit than it envisaged when it came to power in 2010.

So far, markets have given the Conservative-led government the benefit of the doubt, but analysts reckon that a darker economic outlook will make it hard for the government t o meet its deficit reduction targets this year and next.

Official data on Thursday is expected to confirm the economy shrank by 0.3 per cent in the first three months of 2012.

Private sector forecasts published by the Treasury last week, show economists reckon the government's budget deficit will come in at 95.7 billion pounds in the current 20 12/13 fiscal year, almost £3bn higher than forecast by the Office for Budget Responsibility.

Tuesday's figures could now push those expectations higher. The government is also seen overshooting its deficit target by more than 7 billion pounds in 2013/14 due to a much weaker growth outlook.

Tuesday's data showed that income tax receipts fell by 7.3 per cent on the year in May, while government spending rose by 7.9 per cent.

Britain's total public sector net debt, excluding financial sector interventions, rose to 1.013 trillion pounds. That was equivalent to 65 percent of GDP, a record for the month of May and the third-highest on record since the series began in 1993.