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Borrowing falls but UK fails to hit target on debt reduction

Published 21/06/2016

Chancellor of the Exchequer George Osborne
Chancellor of the Exchequer George Osborne

George Osborne is facing a setback in his efforts to shore up the nation's finances after borrowing reached a worse-than-expected £9.7 billion last month.

The Office for National Statistics said public sector net borrowing excluding public sector banks dropped by £0.4 billion in May, compared with the same month last year, but failed to meet economists' expectations of £9.5 billion.

The ONS said public sector net debt excluding banks climbed £49.6 billion to £1,606.9 billion over the period, the equivalent to 83.7% of gross domestic product (GDP).

It added that the Chancellor is now judged to have borrowed £74.9 billion for the complete financial year ending in March 2016, meaning he overshot his annual target by less than previously thought.

The ONS said in May that public sector net borrowing for the financial year had hit £76 billion - a £2 billion rise on its initial estimate.

The Office for Budget Responsibility had forecast borrowing to hit £72.2 billion for 2015/16. It means Mr Osborne has now missed this target by £2.7 billion.

Mr Osborne has pledged to return the UK to a surplus by 2020, with the OBR forecast stating that the UK would have a budget surplus of £10.4 billion in 2019/20 and £11 billion the year after.

However, the Chancellor has already been blown off course, with borrowing in the current financial year to date hitting £17.9 billion, a £0.2 billion jump compared with 2015.

It comes despite Government tax receipts rising over the period by 3.4% to £103.8 billion.

The Government coffers were boosted in the main by stamp duty on land and property, which surged by just over a fifth to £2.1 billion in the period.

But this was swallowed up by a 2.1% rise in Government expenditure to £119.7 billion between April and May this year, as net social benefits, net investment and debt interest costs all increased.

Samuel Tombs, chief UK economist of Pantheon Macroeconomics, said the public finance figures for May "cast more doubt" over whether Mr Osborne can achieve a budget surplus by the end of this parliament.

He added: "Undeniably, hefty public borrowing reflects the impact of uncertainty created by the EU referendum on the economy.

"The latest figures therefore provide just a taste of what Brexit would do to the health of the Government's finances.

"But even if the UK votes to remain in the EU this week, we think that the Chancellor only has a slim chance of meeting his budget surplus goal. In particular, the fiscal projections rest on very optimistic assumptions for revenues from tax avoidance measures and savings from the welfare budget.

"Meanwhile, the Conservatives' slim majority in the House of Commons likely means it will be impossible for the Chancellor to get political support for a further intensification of austerity in order to obtain a budget surplus."

British Chambers of Commerce chief economist David Kern said: "Although borrowing fell marginally in May, the first two months of the current financial year point to disappointing progress in reducing the deficit, and our assessment remains that reaching a budget surplus by the end of the decade will be difficult to achieve.

"The slow progress so far is not surprising given the difficult economic circumstances facing the UK, which is making it more difficult to generate tax receipts. Stabilising the public finances remains a critical task, without which it will be difficult to achieve sustainable long-term economic growth."

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