June 26, 2012 / 8:34 AM / 7 years ago

Public borrowing rises in May as income tax falls

LONDON, June 26 - Britain’s government borrowed more than expected in May after income tax receipts fell and spending rose, in a sign the Conservative-Liberal Democrat coalition may struggle to meet its austerity target this year as the euro zone crisis rumbles on.

A man leaves the government Treasury buildings in Whitehall in central London October 19, 2010. REUTERS/Toby Melville

Britain’s economy fell into its second recession in four years at the start of 2012, and chancellor George Osborne has admitted his deficit reduction plan would take two more years than planned because of a weaker than expected economy.

A weak economy plays havoc with government budgets by reducing the money generated from business and income taxes and driving up welfare spending because of higher unemployment.

Bank of England Governor Mervyn King said on Tuesday the outlook had become bleaker because of the ongoing banking and debt crises in the euro zone - bad news for Osborne who needs a swift return of strong growth to give his deficit reduction plans any chance of success before the next election in 2015.

“The combination of worsening public finances and renewed recession is likely to intensify calls for the government to change tack on it austerity programme,” said Martin Beck at Capital Economics.

Public sector net borrowing excluding interventions such as bailouts and support to the financial sector (PSNB-ex), the government’s preferred measure of borrowing, came in at 17.943 billion pounds last month, up from 15.195 billion last May, the Office for National Statistics said.

This was above economists’ forecasts for 14.8 billion pounds and took borrowing in the fiscal year to date to 356 million pounds, compared with 24.470 billion a year ago.

That cumulative figure was flattered by a one-off transfer of assets from the pensions fund of the state-owned postal service in April. Without this effect, PSNB-ex would have been 28.4 billion pounds in April and May combined.

In addition, the ONS revised up borrowing in 2011/12 to 127.6 billion pounds from 124.4 billion pounds, meaning that the government just missed its full-year target of 126 billion pounds for the last fiscal year.

DEFICIT TARGET IN DOUBT

Tuesday’s figures cast doubt over the government’s ability to meet its deficit target of 92 billion pounds in the 2012/13 fiscal year - a total which includes the asset-transfer effect.

Britain’s total public sector net debt, excluding financial sector interventions, rose to 1.013 trillion pounds. That was equivalent to 65 percent of GDP, a record for the month of May and the third-highest on record since the series began in 1993.

“The government is committed to dealing with the deficit, which will help keep interest rates lower for longer and support millions of families and businesses across the country,” a spokesman for the Treasury said.

Official data on Thursday is expected to confirm the economy shrank by 0.3 percent in the first three months of 2012.

Tuesday’s data showed that income tax receipts fell by 7.3 percent on the year in May, while government spending rose by 7.9 percent.

Editing by Robin Pomeroy

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