Labour borrowing blow as Treasury overshoots forecast by £8.1bn

Government debt edges towards £3 trillion as spending outpaces revenues, piling pressure on Chancellor John Healey ahead of next month’s Budget

Labour has been dealt another blow over the state of the public finances after official figures revealed the Government has borrowed £8.1 billion more than forecast so far this financial year.

Figures released by the Office for National Statistics on Tuesday show public sector borrowing reached £18.3 billion in August, £2.9 billion more than in the same month last year and £3.5 billion above the Office for Budget Responsibility’s forecast.

That brings borrowing between April and August to £77.3 billion, £8.1 billion above the OBR forecast made in March.

The figures present an increasingly difficult backdrop for Chancellor John Healey as he prepares to deliver his first Budget on October 28.

While borrowing over the first five months of the financial year was actually £2.2 billion lower than during the same period last year, Labour had been expected to make considerably faster progress in bringing the deficit down.

The Telegraph reported that economists believe Mr Healey could need to find billions of pounds through tax increases or spending reductions if he wants to rebuild the Government’s rapidly shrinking fiscal headroom.

Reuters reported that the Chancellor’s fiscal buffer, which stood at more than £24 billion in March, has been squeezed to just over £10 billion following increases in government borrowing costs.

The deterioration comes despite substantial tax revenues flowing into the Treasury.

According to figures reported by the Telegraph, income tax, capital gains tax and National Insurance receipts reached £231 billion during the financial year to August, £16.6 billion higher than during the same period last year. Inheritance tax receipts also increased to £3.8 billion.

Yet spending continues to put pressure on the public finances.

Debt interest alone reached £8.8 billion in August, the highest figure recorded for the month since records began in 1997. Almost £30 billion was also spent on benefits during August, around seven per cent more than a year earlier.

The scale of Britain’s debt is also approaching another symbolic milestone.

Public sector net debt was provisionally estimated at £2.9855 trillion at the end of August, £78.5 billion higher than a year earlier. It was equivalent to 93.8 per cent of GDP.

The figures will inevitably fuel the argument over whether Labour should respond by raising still more tax, or by getting a tighter grip on government expenditure.

Dr Valentin Boboc, senior economist at the Institute of Economic Affairs, told the Telegraph that the figures were another warning that the Government could not simply tax its way out of the problem.

He pointed to the uncomfortable combination facing ministers, tax receipts are increasing, yet expenditure is rising faster, while servicing the country’s enormous debt remains expensive.

Andrew Griffith, the Conservative shadow chancellor, was considerably less diplomatic, accusing Labour of “financial incontinence”.

He said: “They are borrowing so much they’ve overshot the OBR forecast by an extra £8bn of debt.”

Mr Griffith added: “It takes a rare fiscal incontinence to have both the highest tax take in history and see borrowing still shoot up.”

The TaxPayers’ Alliance also called on the Chancellor to address the welfare bill rather than resort to further tax increases.

Chief executive John O’Connell said: “These borrowing figures are a stark warning that Britain is living far beyond its means.”

He added: “The Chancellor should focus on tackling the ballooning welfare bill not reaching for another tax raid.”

Labour, however, argues that global economic pressures, including higher inflation and borrowing costs following the outbreak of war with Iran, have made managing the public finances significantly more difficult.

Chief Secretary to the Treasury Emma Reynolds said the Government remained committed to its fiscal rules and warned that “tough decisions” would be necessary to keep the public finances sustainable.

The ONS also cautioned that the picture is more nuanced than the headline overshoot suggests. Borrowing so far this financial year remains £2.2 billion lower than during the equivalent period last year, while debt as a proportion of GDP is 1.3 percentage points lower than a year ago.

Nevertheless, Labour now heads towards the October Budget with borrowing running billions above the official forecast, debt hovering just below £3 trillion and pressure mounting over how the Chancellor intends to balance the books.

For taxpayers already facing a historically heavy burden, the central question will be whether Labour responds by restraining spending, or once again turns to higher taxes.

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