Government borrowing hits record August high
• Public sector borrowing hit £15.9bn last month
• City analysts were expecting £13.2bn
• Bank of England minutes hint at more QE
George Osborne is still likely to miss his borrowing targets for the year. Photograph: Luke Macgregor/Reuters
Government borrowing hit a record high for August last month, as increased spending put Britain's public finances under renewed pressure.
With the UK economy weakening, the Bank of England has signalled that it stands ready to pump more money into the economy, possibly as soon as next month.
The government's preferred measure, public sector net borrowing excluding the impact of banking bailouts, rose to £15.9bn last month, the highest August figure on record, and compared with £14bn a year ago, according to the Office for National Statistics. It was also higher than the £13.2bn expected in the City.
The ONS also reported that the government had borrowed less in previous months than originally thought, landing George Osborne with a near £5bn windfall. Even so, City analysts warned that the chancellor is likely to miss his borrowing targets for this year, but the Treasury insisted that he is on track.
A Treasury spokesman said: "These are challenging times, but despite economic growth being lower than the OBR's forecast earlier this year, tax receipts have continued to grow and spending so far this year has grown at the rate the Office for Budget Responsibility forecast in the budget. These figures also include a welcome and substantial downward revision to borrowing so far this year and to overall borrowing last year."
Borrowing in the financial year so far was revised lower by £4.6bn to £51.5bn, mainly because of a recalculation of local government data and income tax receipts. Last year's total figure was revised down to £136.7bn.
Chris Williamson, chief economist at Markit, said the official figures dealt a blow to the government's deficit reduction targets. "There seems little hope that the government will hit its spending targets this year, as slower growth means less tax revenues and higher welfare spending," he said.
The International Monetary Fund said this week that if UK growth turns out weaker than expected the government should ease the pace of its deficit reduction plans. The IMF slashed its forecast to 1.1% economic growth this year from 1.5%, and to 1.6% for 2012, down from 2.3%. Osborne has so far resisted pressure to reconsider his austerity measures.
The minutes of the Bank's monetary policy committee meeting a fortnight ago showed that all nine members voted to keep interest rates unchanged, and only one member, the American economist Adam Posen, backed more quantitative easing. However, the tone of the minutes suggests the debate is shifting towards more economic stimulus – probably before Christmas.
"For some members a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting," the minutes said.
This "strongly suggests that QE2 is set to be launched in the very near future," said Samuel Tombes, UK economist at Capital Economics.
Public finances under pressure
Commenting on the public finances, Howard Archer of IHS Global Insight warned that Osborne will miss his targets if the economy deteriorates. "If the overall performance of the first five months was replicated through the rest of the fiscal year, public borrowing would come in around £127bn, compared with the targeted £122bn," he said.
"However, it is highly likely that the public finances will be increasingly pressurised by muted economic activity eating into tax revenues and pushing up unemployment benefit claims, so the shortfall currently looks set to be appreciably more than this."
Speaking before the latest public finance figures were released, Danny Alexander, chief secretary to the Treasury, said the government would not be knocked off course by the IMF's lower forecasts.
Fears over the health of the public finances were stoked this week when the Financial Times found a £12bn black hole. Its calculation, based on the Office for Budget Responsibility's methodology, showed that the structural deficit is 25% bigger than previously thought. Economists said the government would be reluctant to resort to any drastic measures such as a 2.5% VAT increase to plug the gap this year, but added that there was now a greater chance of more cutbacks in the future, with austerity likely to last into the next parliament.