George Osborne looks set to be hamstrung in his final Budget by a fiscal black hole, as fresh data showed the government has been forced to borrow £5.4bn in the first half of the financial year, against predictions of a £12bn fall for 2014 as a whole.
According to the latest official data published today (21 October), the government borrowed £11.8bn in September. This is £1.6bn more than in the same month last year and defied market expectations of a £200m fall.
Having predicted a fall in borrowing of £12.4bn in 2014, a report from the Office for Budget Responsibility and the Treasury noted that borrowing has been higher on a year-on-year basis in every month since the start of the financial year, leaving borrowing £5.4bn higher overall.
Office for National Statistics data reveal the government has borrowed £58bn in the first six months of the year, up from £52.6bn last year.
The OBR report ascribes the dire figures to anaemic growth in tax receipts of just 2.4 per cent, half of the 5 per cent originally forecast, despite a gathering economic recovery which has seen annual GDP growth reach 3.2 per cent and unemployment hit a six-year low of 6.2 per cent.
In particular, the report cites “weaker-than-expected wage growth, lower-than-expected residential property transactions and lower oil and gas revenues”.
Others have focused on the below-forecast growth in income tax revenues after the government increased the lowest tax threshold to £10,000, as persistently low wage growth prevents the government benefitting from jobs creation.
Income tax-related payments increased have risen by 0.1 per cent in the first six months of this year, compared to the same period last year, nudging up by £100m to £71.5bn.
The OBR added that receipts for 2013 were flattered by a shift in income from the previous tax year, as higher earners sought to take advantage of a reduction in the highest income tax band to 50 per cent. The figures also benefitted from a £900m inflow from tax on Swiss bank accounts.
It states: “... [W]e expect receipts growth to be end-loaded in 2014-15 because of the shifting of liabilities due to the reduction in the additional rate to 45p.
“However, factors such as weaker-than-expected wage growth, lower-than-expected residential property transactions and lower oil and gas revenues mean it is looking less likely that the full year receipts growth forecast will be met.”
Commenting on the figures, Frances O’Grady, Trade Union Congress General Secretary, said: “It’s time for George Osborne to admit he got his strategy wrong. Today’s figures show the deficit getting bigger as tax revenues dry up.
“The 90,000 people who marched through the streets of London on Saturday calling for a pay rise understand that it’s not just British workers who need wages to go up, but that’s what the Treasury and the economy needs too.”
Furthermore, the EY Item Club has forecasted GDP growth of 3.1 per cent this year and 2.4 per cent for next year, with interest rates on hold until the spring of 2015.
Peter Spencer, chief economic adviser to EY Item Club, added that consumer spending remains subdued by falling real wages – a situation that has helped to keep inflation at bay.
He said: “With falling global commodity prices helping to keep input prices down, we expect CPI inflation to slow to an average of just 1.3% in 2015, and to stay below 2 per cent until 2017.
“Subdued consumer spending has also seen business investment take over as the engine of recovery. Capital spending accounted for almost half the rise in GDP in the past year. However, as political and economic risks and uncertainties multiply – ranging from the UK general election to the Eurozone’s slowdown to the situation in the Ukraine – this engine is now under threat.
“Recently, the UK economy has surprised on the upside. It might again. But currently, the balance of risks is downwards.”
ashley.wassall@ft.com
