UK’s deficit reduction target in doubt as public sector borrowing shoots up

Pound coins

The UK’s borrowing was much higher than expected in October 2012, increasing speculation that the government will miss its deficit reduction target for 2012-13.

Public sector net borrowing last month, excluding financial sector interventions, amounted to GBP8.6bn. This is GBP2.7bn higher than in October 2011, when net borrowing stood at GBP5.9bn, the Office for National Statistics (ONS) said.

Ahead of the latest figures being released, economists had forecast borrowing for the month of around GBP6bn.

Much of the year-on-year increase in government borrowing for October was attributed to corporation tax receipts falling by nearly 10%, combined with a rise in day-to-day departmental spending.

With the latest increase in borrowing, analysts have suggested it is now unlikely that the government will meet its target to reduce public sector net borrowing for the year to GBP120bn.

The Office for Budget Responsibility will publish new projections for the public finances on 5 December and is expected to revise its estimate for the deficit in 2012-13 to at least GBP130bn. On the same day Chancellor George Osborne is due to present his autumn statement in the House of Commons and will have to decide whether to introduce further austerity measures in an effort to rein in the deficit.

David Kern, chief economist at the British Chambers of Commerce, commented today that the government must stick with its plan to reduce the deficit over the medium term in order to maintain credibility, but he stressed that there is also a risk that, if weak growth continues, borrowing could overshoot even further.

“The government should look to make cuts in areas such as welfare reform, pensions and the size of the civil service to ensure that the structural deficit is gradually reduced. We will also be looking to the chancellor to announce measures in his autumn statement that will boost growth and enhance the productive capacity of the UK,” Kern added.

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