Business

Public borrowing at £11.6bn in August

Chancellor of the Exchequer George Osborne outside Number 11 Downing Street Image copyright Getty Images
Image caption Government borrowing is more than 6% higher than at the same time a year ago, official figures have shown

Government borrowing remained high in August, hampering the chancellor's efforts to reduce the public deficit, official figures show.

The Office for National Statistics (ONS) said public sector net borrowing stood at £11.6bn last month.

Total borrowing for this year stands at £45.4bn, some 6.2% higher than at the same time a year earlier.

However, comparisons are difficult because of changes to the methodology this month.

The latest figures are designed to meet EU standards and include financial sector interventions that were left out in the old figures.

As part of the changes, Network Rail has been moved from the private sector into the public sector.

On the old basis, the figure would have been £12.5bn, up from £11.5bn in August 2013.

'Slow process'

Economists have spoken of a "taxless" recovery that has made it harder for Mr Osborne to balance the books.

This refers to the fact that receipts from income tax have not been rising as much as the government would have hoped, despite rises in the number of people in work, because pay rises have been meagre for many.

August continued this trend, with income tax receipts and social security payments growing just 1.6% from the previous year.

For the tax year so far, the amount has been 0.6% lower than in the same period a year earlier.

Analysis: Simon Jack, business correspondent

One part of the government's long-term economic plan seems to be working, another part does not. Although unemployment has fallen quickly, government borrowing is going in the other direction.

The weak link is income tax and there are a couple of explanations as to why.

First, there has been a big drop in youth unemployment and obviously, young people entering the workforce tend to do so on lower wages.

Second, there has been an explosion in self-employment. We won't know how much there people are earning and therefore how much tax will be collected until after the self-assessment tax returns in January, but self-employed people tend to earn less than salaried staff.

There is some evidence that last year's income tax numbers were boosted by high earners delaying their bonuses until after the top rate of tax was abolished in April 2013, meaning more tax was collected in May last year than May this year.

However, Treasury officials are aware that the income tax take could disappoint, making deficit reduction - the other leg of the long-term economic plan - harder to deliver.

"August's public finances data suggest that deficit reduction remains a grindingly slow process," said Martin Beck, senior economic adviser to the EY Item Club.

"The chances of the chancellor enjoying a fiscal windfall from the strong economic recovery in time for the Autumn Statement are looking increasingly slim.

"Rather than being in a position to offer some tax or spending sweeteners to kick in before next May's general election, he may be faced with the unpalatable choice of announcing further fiscal tightening or a slippage of deficit reduction plans."

David Kern, chief economist at the British Chambers of Commerce (BCC), said the deterioration in public finances was "disappointing" but not a huge surprise.

"The sharp fall in oil and gas output since the financial crisis, and the problems facing the UK financial sector, have both created a major hole in the UK's ability to generate tax revenues, even when economic growth improves," he added.

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