“Six months into the year and borrowing remains off track compared both to last year and this year’s plan. In the first six months, total borrowing was £46.2 billion compared to £42.3 billion in 2013. In September, borrowing was £11.8 billion compared to £10.3 billion in the prior year.
“The UK economy grew by just over 3% in the first half of the year. We would expect an improvement in borrowing given the strength of the recovery. Last year’s figure has been revised down to £98 billion for the year as a whole. Good news but revenues will have to improve if this year’s OBR forecast is to be met.
“Spending is not really the problem. The squeeze on local government continues as departmental spending increased by a modest 1.6%. The paradox of thrift continues as debt payments were up by 2.6% and social security payments increased by 3%.
“The real problem for the Chancellor is revenue. Central government receipts were down compared to last year, despite a strong rise in VAT (up 3.9%) and stamp duty (up 25%). Corporation tax revenues were healthy, up by over 5% but income tax revenues increased by just 0.1%. This is a real problem in an economy growing at over 3% expanding jobs in the process. The low growth in earnings is largely to blame perhaps but the paradox is at odds with basic economics.
“Compounding the embarrassment for Treasury is the fall in interest and dividend receipts from the ‘Money for nothing, gilts for free’ programme otherwise dubbed ‘QE’. Interest and dividends fell by £7.3 billion to just £9.1 billion.
“Public sector net debt excluding financial interventions (PSND ex) was £1.45 billion in September 2014, £100.7 billion or 7.5% higher than at the end of September 2013. That’s approximately 80% of GDP.
“So what can we make of it all? The government is set to miss the OBR target for the current year, with borrowing overshooting the £100 billion mark in the year unless some dexterous accounting takes place. A serious embarrassment in the immediate run up to the election in either case.”
To read the latest full UK Economic Outlook, click here: http://www.gmchambereconomics.com/uk-outlook.html