PSBR blow to Chancellor's tax hopes

Kenneth Clarke's hopes of delivering a credible tax-cutting budget were dealt a severe blow yesterday with figures showing an increase in the Public Sector Borrowing Requirement in the first six months of the financial year compared with 1994-95.

The September PSBR was pounds 3.7bn, taking the total in the first half of the financial year to pounds 20.4bn, pounds 300m more than in the first six months of 1994/5. The underlying PSBR, excluding privatisation proceeds, has fallen by pounds 2bn over the same period - but privatisation revenues are forecast by the Treasury at only pounds 3bn, compared with pounds 6.5bn last year

"The Tories have broken their promises on tax and public spending and now they are breaking them on borrowing too," said Andrew Smith, Shadow Chief Secretary. The Teasury acknowledged that the outturn so far was not as had been hoped, but maintained that the deficit was still still on a downward trend, with several months of heavy tax receipts ahead.

"The Chancellor will be reliant on spending cuts and a re-emphasis on eliminating the deficit over the longer term to justify any tax cuts," said David Hillier, UK economist at NatWest Markets. "The PSBR is on the disappointing side of expectations again," commented Helen MacFarlane, economist at Hoare Govett, "but this won't necessarily stop the Chancellor using his ingenuity to cut personal taxes next year." She added that such taxes "may well be accompanied by higher taxes elsewhere, in particular in the corporate sector."

Revenues, particularly from corporation tax, are expected to pick up in the second half of the financial year. But many City forecasters now project a PSBR close to last year's outturn of pounds 35.9bn. For example, Salomon Brothers, has lifted its forecast from pounds 28.5bn to pounds 30bn.

One reason for the overshoot has been a swing in the local authorities borrowing requirement of pounds 1.4bn in the first half of the year compared with the same period in 1994/5. "The most likely explanation is that local authorities are spending above target," said Michael Saunders, economist at Salomon Brothers.

Central government departmental outlays grew 3 per cent in the six months to September compared with 1994-95, which is less than the 3.5 per cent forecast by the Treasury in June. Interest payments were also in line with Treasury projections.

The problem has arisen principally on the revenue side of the accounts. Inland Revenue receipts were 9.5 per cent higher than in 1994/5, with income tax revenue up by about 8 per cent and corporation tax up by 17 per cent.

In June, the Treasury forecast that Inland Revenue receipts would rise 15 per cent in a full year, with income tax climbing 9.4 per cent and corporation tax by 35 per cent.

Customs & Excise revenue rose by 7.5 per cent in the first half, compared with a forecast for the year of 9.7 per cent.