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19.02.16

Public sector borrowing likely to hit £80bn - IFS

Plans to eliminate the government deficit could be threatened by a weaker economic outlook despite public finance being in surplus, experts have warned.

Central government receipts were 3.4% in January 2015 than the previous January, but this is beneath the Office for Budget Responsibility’s (OBR’s) 3.8% forecast.

The government created an £11.2bn surplus by saving £15.3bn on day-to-day activities in the public sector but spent £4.1bn on infrastructure. So far this financial year the public sector has borrowed £66.5bn, £10.6bn lower than last year.

Thomas Pope, a research economist at the Institute for Fiscal Studies (IFS), said: “As is usual, and was expected, the government ran a surplus in January, with receipts exceeding spending by £11.2bn.

“Receipts of capital gains tax were strong and those of corporation tax were weak, both of which were anticipated by the OBR. Self-assessment income tax receipts were weak in January, although it is possible that – with the last two days before the payment deadline falling at the weekend – some of the strong growth in receipts expected this year will be reflected in next month’s numbers.

“A simple extrapolation of borrowing over the first 10 months of this financial year suggests that it is on course to come in closer to £80bn than the £73.5bn forecast by the OBR. But £4bn of this apparent overshoot is accounted for by rapid growth so far in investment spending which may well not persist. Were borrowing to come in at around £76 bn this should be considered to be very close to the OBR’s November forecast.

“In the forthcoming budget the key issue will be the forecast for borrowing in 2019–20 as Mr Osborne has committed to eliminating the deficit by that year. The last OBR forecast suggested he had a surplus of £10bn. But this could easily be eliminated by a weaker outlook for the economy, even if associated with a reduction in forecast debt interest spending. Any budget giveaways – for example to deliver manifesto commitments to reduce income tax, or to cut taxes on North Sea oil and gas producers – would make it harder to deliver a budget surplus.”

In January 2015 capital gains receipts grew by 27.7%, partly due to strong house price growth, but self-assessment income tax receipts only increased by 1.6%, compared to 5.3% predicted by the OBR. Corporation tax receipts fell by 7.8% and NICs and VAT underperformed, with 3.7% and 2.7% results versus 4.1% and 3.6% predictions.

If the year-on-year growth pattern of the last 10 months were to persist for the rest of the year, today’s figures imply that total public sector net borrowing would be £79.3bn, £5.8bn more than the OBR forecast in November. However, £3.8bn of this difference arises from the fact that Public Sector Net Investment has been higher than forecast so far this year, and it might well be that strong growth in spending so far this year will not persist into February and March.

Last year the LGA warned that cutting services would not be enough to plug the government deficit.

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