Borrowing leap hurts tax hopes

DIANE COYLE

Economics Correspondent

The scope for tax cuts in the Budget was thrown into doubt yesterday by an unexpected jump in Government borrowing. The public sector borrowing requirement was pounds 1bn more than expected last month, at pounds 4.6bn.

However, the Governor of the Bank of England brought some relief on interest rates. In a speech to the North West Chamber of Commerce last night, Eddie George said the Bank had stopped pressing for an immediate rise in base rates because the economy had weakened more than expected.

He warned that an increase might still be needed later to bring inflation below the Government's 4-per-cent ceiling.

The Government's borrowing total so far this financial year is higher than at the same stage last year, suggesting the Government will miss its 1995/96 target of pounds 23.6bn.

In the City, economists yesterday raised their expectations of this year's PSBR to around pounds 28bn. Keith Skeoch, chief economist at James Capel, said: ``The case for tax cuts in this year's Budget looks increasingly dependent on Mr Clarke's ability to deliver a tough spending round.''

The Treasury said it was very difficult to forecast the total at this stage. However, borrowing for the rest of the year would need to be pounds 2bn a month lower on average than in 1994/95 for the Government to get back on target.

There was no single reason for the disappointing August figure. One factor was departmental spending growing a little faster than the Treasury forecast.

Kenneth Clarke, Chancellor of the Exchequer, yesterday repeated his commitment to firm control of public spending as essential to good economic performance.

Debt interest payments have surged because of earlier increases in short- term interest payments. The interest bill is, at pounds 9bn, 13 per cent higher so far this year than last.

However, the bigger concern in yesterday's borrowing figures was the slow growth of tax revenues across the board.

Kevin Darlington, UK economist at stockbroker Hoare Govett, said: ``What is worrying about this is that it is impossible to pinpoint any one problem.'' Revenues in the year to date are 8.5 per cent higher than at the same stage last year, compared to a Treasury forecast of 11 per cent growth. Economists said the combination of slower growth and low inflation explained the shortfall, which has affected VAT receipts most.

There has been no revenue from privatisation so far this financial year. The Treasury predicted a total of pounds 3bn, but the only payments due are second tranche receipts from the sale of the electricity generating companies in February.

The PSBR is notoriously difficult to forecast, being the difference between two large and volatile numbers.

The Treasury's average forecast error is more than pounds 10bn either way. Even so, yesterday's figures led City analysts to conclude that tax cuts of more than pounds 2bn-pounds 3bn - equivalent to 1p to 1.5 p off the basic rate of income tax - would alarm the financial markets.

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