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Borrowing data not enough to achieve debt-reduction target

Wednesday 24th October 2012

Data released by the Office for National Statistics show that UK public sector net borrowing excluding financial interventions was £12.8billion in September 2012. Encouragingly for the UK Government's deficit reduction efforts, this is £ 0.7billion lower than net borrowing was in September 2011 when it stood at £13.5billion.

Tax takings have also risen. Central Government current receipts were £42billion in September 2012, 3.7% higher than in the same month last year. For the six months to September 2012, tax takings were £255.5billion, some 0.8% higher than over the same period a year ago.

According to Daniel Solomon, Economist, Centre for Economics and Business Research, tax takings tend to rise as the economy becomes more buoyant, so these improved tax takings could be a sign of modest improvement in the economy.

He said that the Cebr expected the UK to exit technical recession this quarter, although growth would be extremely weak.

"Almost all sources of tax revenue rose over the year," he said. "For the year to September 2012, income and capital gains tax rose by 3.1% and VAT rose by 5.5% (although the VAT hike was partially responsible for this). By contrast, corporation tax fell by approximately 1.5% over the year, reflecting weak business sentiment.

"While [today's] data are encouraging, they are not enough to remedy the UK's weak fiscal position.

"The Chancellor's fiscal targets require that Britain's public sector net debt to GDP ratio begins to fall by the end of this Parliament in 2015. Official projections are that the ratio will peak at 76.3% of in the 2014/15 financial year. If he is to succeed in this aim, the UK needs robust economic growth in order to generate the tax revenue required to reduce the debt to GDP ratio. Cebr forecasts that economic growth will be weak going forward: a 0.6% decline this year; 0.5% growth  in 2013; and under 2.0% growth in subsequent years. These anaemic growth rates imply that the debt to GDP ratio will still be rising come the next election.

"Total net debt (excluding financial interventions) continues to rise and now stands at 67.9% of GDP, up from 66.1% in August. The Chancellor's deficit reduction efforts are fundamentally dependent upon economic growth - a factor over which he has almost no control. Growth is coming in weak, so he may have to abandon his official target come Budget Day."

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George Bailey

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