Pressure is building on Alistair Darling to bring the fiscal deficit under control after the government finances recorded a record £15.7bn shortfall in December.
December tends to be a poor month for the public finances. The figure compares with £13.8bn a year earlier and was better than the £18.7bn gap expected in the City, but still left government borrowing for the year so far at nearly twice last year’s levels. The cumulative deficit amounts to £119.9bn versus £63.6bn a year ago.
But the chancellor now looks well on track to meet his borrowing forecast of £178bn this financial year, or might even undershoot it. Some economists say £160bn to £165bn now looks possible.
Much depends on this month, usually a bumper month for tax receipts as tax from self assessment and big corporations falls due. Tax revenues will get a boost from the expected return to growth in the economy, coupled with the VAT hike to 17.5 per cent at the start of the year and much bigger than expected receipts from the bonus tax on bankers, while falling unemployment should reduce spending on benefits.
Jonathan Loynes of Capital Economics said the figures “further underline the case for a major fiscal tightening after the general election”. He added: “With Darling’s own forecasts pointing to a large structural deficit, market worries about the UK’s finances and credit rating are unlikely to ease until more decisive corrective action is unveiled. A painful fiscal squeeze lies ahead.”
Britain’s net debt now stands at £870bn – equivalent to nearly 62 per cent of GDP – partly due to the banking bailouts.
Bank of England governor Mervyn King this week stepped up the pressure on Darling to set out big spending cuts in his March budget. And the Fitch rating agency warned the government’s plan to halve the deficit by 2014 does not go far enough.