Fresh setback for Chancellor on borrowing

The Government's plans to cut its level of borrowing were dealt a new blow by figures showing that the shortfall between revenues and spending was half a billion pounds more than expected last month, despite a boost of pounds 436m from the sale of loan stock in BT.

Public expenditure has run well ahead of plans so far this financial year. The overshoot means that the Public Sector Borrowing Requirement, excluding privatisation receipts, is only slightly lower than at the same stage last year.

The lack of improvement in the underlying trend in government borrowing will put even more pressure on Kenneth Clarke, the Chancellor of the Exchequer, to find additional cuts in spending plans ahead of November's Budget. Without these it will be difficult to justify the widely expected tax cuts, especially as the Treasury only recently revised up the Government's borrowing targets to pounds 27bn this year and pounds 23bn next year.

Mr Clarke yesterday fired the first shot in the spending round, saying forthcoming pay deals in the public sector would have to be lower than this year. As in previous years, pay increases would have to be matched by efficiency gains.

However, business leaders called on the Chancellor to resist the temptation to cut taxes. In their Budget submission, the British Chambers of Commerce said the Government must continue its efforts to reduce the PSBR.

David Richardson, BCC president, said: "Careful management of the economy must not be driven off course by political expediency in an election year. The needs of British business should be put before short-term political gain."

He also urged Mr Clarke not to repeat his habit of paying for reductions in some taxes by increasing others.

Alistair Darling, Shadow Treasury chief secretary, said the latest borrowing figures "show just how hollow are the Government's claims that the public finances are back on track". Labour would introduce an independent audit of the public finances, he said.

The PSBR was pounds 4.53bn in August, in a dramatic turnaround from a pounds 1.7bn surplus of receipts over expenditure the previous month. The sale of British Telecom loan stock for pounds 436m prevented an even more disappointing shortfall.

Excluding privatisation receipts, Government borrowing has amounted to pounds 16.1bn in the first five months of the financial year, compared with pounds 16.7bn at the same stage last year. The headline figure so far this year, at pounds 13.4bn, is more than pounds 3bn lower than last year thanks mainly to pounds 2.7bn so far from privatisations.

If the improvement continues at the same modest rate, the PSBR would be about pounds 29bn this year, pounds 2bn higher than the Government's pounds 27bn target.

Receipts were significantly lower last month than a year earlier, but have risen by about 6 per cent in April-August compared with a year earlier. This is slightly faster growth than the Treasury's forecast.

Some economists said revenues were disappointing. Ian Shepherdson at HSBC Markets said: "There is no sign that the improvement in the economy is feeding through to tax receipts."

But the bigger threat to this year's plans is the growth in government spending, unlike last year, when disappointing tax revenues torpedoed the borrowing target. Expenditure in the five months to August was 4.5 per cent higher than a year earlier, compared with a planned 2.9 per cent.

City experts said there was still a chance that spending would come back into line with the plans. According to David Walton at Goldman Sachs, the pick-up in the first part of the financial year could be due to a change in the timing of public expenditure. Departments might be moving away from the rush to use budgets late in the financial year. The prospects for hitting the spending target will be clearer by Budget-time, when the financial year will be more than half over.

The City still expects Mr Clarke to announce tax cuts worth a few billion pounds in his Budget.