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European payment hits deficit hopes

An extra £2.9 billion contribution to the European Commission budget has delivered a blow to George Osborne's hopes of cutting the deficit as it pushed up public sector borrowing in December.

Official figures showed a shortfall - excluding the effect of bank bail-outs - of £13.1 billion for the month, up from £10.3 billion a year before.

The difference was entirely accounted for by the UK's higher European contribution, recalculated because the economy was performing better than had been thought.

This will be partially made up for by a refund and rebate totalling £2 billion, not likely to be recorded in the public finances until the next fiscal year.

But it means borrowing for the April-to-December fiscal year to date is now, at £86.3 billion, just 0.1% lower than in 2013/14.

That compares with the independent Office for Budget Responsibility (OBR) forecast of a 6% fall in the annual deficit for the year to March. It was revised down last month from a tougher target of 11%.

There was better news from income tax and capital gains tax receipts, which saw their best December performance in four years, climbing by 3.1% to £12.6 billion on the year.

Revenues from income tax have caused a headache in recent months as they have not been growing as much as expected despite the upturn in growth and record job numbers.

The year-to-date borrowing figure was boosted by a £2.5 billion downward revision, partly due to a £900 million upward revision in income tax receipts so far in 2014/15.

VAT revenues for the year to date were also marked up, by £700 million.

Underlying net debt was £1.483 trillion - 80.9% of gross domestic product, a record figure.

Samuel Tombs of Capital Economics said: "December's UK public finance figures show that the pace of deficit reduction remains disappointingly slow in light of the economy's recent strength.

"In order to meet the OBR's forecast made only a month ago for a 6% reduction in borrowing this year, the deficit will have to be a hefty £6 billion,or 54% lower, in the remaining three months of this fiscal year than it was last year.

"Admittedly, January should see a £3 billion or so boost to self-assessment income tax receipts, which relate to the 2013/14 year to which some taxpayers deferred income to take advantage of April 2013's cut in the top rate of income tax.

"But even stripping out the effect of that boost, borrowing will still have to be £3 billion, or 26%, lower than last year - a very tall order."

A Treasury spokesman said: "Today's public sector finances show that the Government's long-term economic plan is working, with borrowing down so far this year and the deficit on track to have halved as a share of GDP.

"But the job is not yet done and the risks in the global economy are growing so the only way to deliver economic security is to carry on working through our economic plan."

Chris Leslie, shadow chief secretary to the Treasury, said: "These figures show George Osborne has broken his promise to balance the books by this year and national debt is still rising.

"His failure on the deficit is because falling living standards over the last five years have led to tax revenues falling short. This Government is now set to have borrowed over £200 billion more than planned."

The European Commission contribution of £2.9 billion was recorded for December to comply with accounting standards, though the cash will not leave the UK until it is paid in the second half of this year.

It will be offset by a refund estimated at £1.2 billion and an increase in the UK rebate estimated at £800 million.

The OBR said its forecast for the annual deficit assumed that the £1.2 billion refund will be accounted for later in the current fiscal year "although the timing of this is not certain".

It said that for the public finances for 2014/15 to meet its target, borrowing for the remaining three months from January to March would need to be £5.9 billion lower than the same period last year.

The OBR expects this to be made up largely by receipts from self-assessment income tax and capital gains tax which it reckons will be £4.3 billion higher in that period than last year.

This would add to the European refund and the impact of debt interest payments that are expected to be around £1 billion lower to help the UK public finances meet the forecast, its calculations suggest.

The OBR pointed out that January was generally the biggest month of the year for receipts, reflecting corporation tax and the majority of self-assessment taxes.

It means the public finance figures for this month, published in February, will be key in determining whether the Chancellor is on course to meet the target.

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