Government slips on spending and borrowing targets

The Government is in danger of missing its own targets for spending and borrowing, and Britain will come embarrassingly close to not even qualifying for membership of the single European currency, because the public finances were not in as healthy a state as first estimated last year.

The disappointing figures, which were probably the result of unexpected higher spending by local authorities, will redouble Gordon Brown's determination to stick to his tough line on expenditure in next month's Budget.

The news will come as a shock to analysts, who have focused on the impressive control of expenditure by central government departments. It could increase pressure on Mr Brown from the City to raise taxes even more than currently planned, as some experts think the Chancellor is already leaving too much of the task of slowing the economy to the Bank of England, which sets interest rates.

The shortfall between revenues and expenditure could now exceed the Chancellor's forecast of a pounds 9.5bn borrowing requirement in the current financial year. It is likely to have been very close to the 3 per cent of GDP ceiling set in the Maastricht Treaty for the calendar year 1997, rather than the 2.3 per cent originally estimated.

Detailed official figures for total current government expenditure in the second and third quarters of 1997 show spending to have been pounds 500,000 higher than first estimates for April-June, and pounds 1bn greater in July-September. Only the revenues from the windfall tax on the privatised utilities in the final quarter of 1997 are likely to have kept the critical deficit to GDP ratio below the 3 per cent limit.

David Owen, an economist at Dresdner Kleinwort Benson, the investment bank, said the overspending was likely to continue into 1998. "With slower growth hitting the government's finances as well this year, we could easily see the targets for the public sector borrowing requirement being overshot," he said.

He predicted the PSBR would amount to pounds 12.3bn in 1998/99, likely to be slightly above this year's out-turn and much higher than the Treasury's forecast of pounds 4.5bn for next financial year. The Red Book analysis of the public sector finances published with the Budget will have to acknowledge the disappointing result for 1997/98 so far.

Although the full details are still unavailable, the slippage on expenditure seems to have come about because of the freeing of proceeds from local authority asset sales for capital spending.

This has allowed authorities to use money that would have been earmarked for investment projects to increase their current spending on items like education budgets and pay.