Treasury on track to trim debt forecast

CHANCELLOR Alistair Darling got a much-needed boost yesterday after February’s public finances proved substantially better than expected, giving the Treasury room for manoeuvre at next Wednesday’s Budget, which may now see Darling able to trim his forecasts for record peacetime borrowing.

Data from the Office for National Statistics (ONS) showed yesterday the government borrowed £12.4bn last month, less than the £14.75bn City analysts had been expecting on average. The reduced shortfall in February puts the cumulative deficit for this fiscal year at £131.9bn, if the improvement is sustained in March.

Although March is typically a heavy month for government borrowing, it now looks like borrowing for the whole fiscal year will come in significantly below the Treasury forecast of £178bn. Citigroup cut its expectation for this year’s government deficit to £168bn in response to yesterday’s figures.

As of the end of February, public sector net debt stood at £857.5bn, or 60.3 per cent of GDP, compared to 50.5 per cent this time last year.

The improvement was driven by stronger growth in tax receipts, which were 3.6 per cent higher on February 2009, partially as a result of the VAT hike.

While economists welcomed the better data, they reiterated that borrowing is still at record levels. Citi’s Michael Saunders said that an undershoot this year would not mean the UK’s fiscal problems are solved. “Not only is the shortfall the highest peacetime deficit for a century, there is no guarantee that an undershoot will carry through into future years. Equally, the improvement might be a result of a pick-up in the wider economy, which won’t tackle the structural deficit,” he said.

Business lobbies and City analysts alike have been calling for the government to rein in public spending. The Institute of Directors (IoD) said the public sector is squandering at least £25bn a year as a result of badly organised procurement and outsourcing.

In a report published today, the IoD proposes centralised buying organisations that handle all key supplier relationships and all national and major contracts on behalf of the whole public sector.