Net borrowing for year 'could be lower than expected'

A tentative improvement in the UK's dire public finances during July fuelled hopes today of a smaller rise in borrowing than first feared this year.

The UK sank further into red in July with net borrowing of £3.8 billion over the month, although this improved on 12 months earlier when borrowing hit £6.1 billion, according to the Office for National Statistics.

The lower-than-expected sum brings borrowing for the four months of the year so far to £44.9 billion, with forecasts of £149 billion for the full year from the independent Office for Budget Responsibility (OBR).

Capital Economics UK economist Vicky Redwood said: "Should borrowing continue along the same path, it would undershoot the OBR's full-year forecast by around £3 billion.

But she added: "This still leaves borrowing at extremely high levels and does not reduce the need for a massive fiscal tightening over the coming years."

The latest figures come as Chancellor George Osborne warned this week of the danger of not sorting out the deficit amid discontent over the savage cuts planned in June's emergency Budget - although Labour has accused the coalition of gambling with the recovery.

July's figures are usually boosted by corporation tax and VAT receipts although the recession forced the UK to borrow during the month for the first time in 13 years in 2009.

Today's figures showed some signs of recovery, however with tax receipts of £49.7 billion - up £4.8 billion on a year earlier and the best July since 2008. The tax take was up 10.5% on a year earlier.

The ONS figures exclude the impact of financial interventions by the Government, which reduce borrowing overall due to factors including profit contributions from the part-nationalised banks.

A Treasury spokesman said: "Today's figures show receipts strengthening in line with the OBR's forecast.

"However, tax receipts remain below their pre-recession peak and the UK is still forecast to have the highest deficit in the G20 this year, which is why the Budget announced measures to bring borrowing down."

David Kern, chief economist at the British Chambers of Commerce, added: "These figures show an improvement compared to a year ago. They also highlight the UK's massive deficit and the major challenge in restoring stability to the public finances.

"British businesses understand that painful measures will be needed over the next few years to reduce the country's unsustainable deficit and they support the Government's focus on spending cuts rather than tax rises."