Osborne set to break benchmark policy on government debt

Public sector borrowing in the UK widened in August to the biggest on record for that month ever recorded making it increasingly unlikely that the government will be able to meet its own targets on deficit reduction.

The government has set a borrowing target for 2012-13 of £120 billion, but analysts think it is increasingly unlikely that this will be met and that the government will overshoot the target by between £10-£20 billion.

This would represent a big dent to the credibility of the Chancellor, George Osborne and the government's economic policy, which has been built on the bedrock of deficit reduction. Mr Osborne promised to get government debt as a percentage of GDP falling rather than rising by the end of this parliamentary term in 2015-16.

However, there was one piece of positive news for the government. Official data from the Office for National Statistics (ONS) shows that government borrowing last year, in 2011-12 was £7 billion less than previously thought, totalling £119 billion.

Treasury minister David Gauke said: "The government borrowed almost £7 billion less last year than previously estimated, down nearly £40 billion from the peak of two years ago. This is further evidence that we are dealing with our debts."

But Shadow Treasury minister Chris Leslie said: "There are now serious questions about whether he can meet his debt target. But without urgent action to kick-start our economy the Chancellor will end up borrowing billions more to pay for economic failure and cause yet more long-term damage to our economy."

The UK’s total public sector debt rose to £1.039 trillion, 66.1 per cent of the total annual GDP of the UK and a represents £41,500 for every household in the country.

This is a rise of £83.7 billion on 12 months ago when total debt was £955.8 billion.

Public sector net borrowing was £14.4 billion in August, the same as August 2011, but the current budget deficit was £13.2 billion, up by £0.4 million on August 2011.

So far, in the first five months borrowing stands at £31 billion, lower than the £48.45 billion seen in the first five months of the 2011-12 financial year.

However, this year’s figures have been boosted by a £28 billion windfall from the Royal Mail’s pension funds. Without that the public debt for this year would be £59 billion, up 21 per cent on the first five months of last year. The government target for the year is to reduce the deficit by 4.6 per cent. 

The figures make it more likely that the government will announce a change of policy in the Autumn Spending Review, due in early December. It is likely that the government will concede that UK debt will grow during the term of this parliament due to end in 2015, especially after the comments made by Sir Mervyn King in an interview with Channel 4 last night.

On Thursday, the governor of the Bank of England, Sir Mervyn King gave the green light for the government to miss their own self-imposed targets on spending in an interview when he said that he would not complain if the government missed its targets because the world economy has grown slowly and the UK has kept pace.

Sir Mervyn said: “If it’s because the world economy is growing more slowly, then it would be acceptable. It would not be acceptable to miss the debt target if there was no excuse for it.”

Howard Archer, Chief UK & European Economist at IHS Global Insight said: “It is likely in his autumn statement in early December that he will either have to acknowledge that he will be unable to start bringing down debt as a percentage of GDP by 2015/16 or announce further fiscal tightening measures.”

Rob Harbon, an economist at the Centre for Economics and Business Research, said: "The Chancellor's aim was to have this debt ratio falling by 2016. However Sir Mervyn said this target could credibly be abandoned given the climate of slowing world economic growth.

"Whether the target is explicitly scrapped or not, it is likely that the public sector debt to GDP ratio will continue to be rising come the end of this Parliament."

The increase in public debt was due to a 2.1 per cent fall in corporation tax receipts and a 4.9 per cent rise in benefit payments.

The UK’s total public sector debt rose to £1.039 trillion, 66.1 per cent of the total annual GDP of the UK. This is a rise of £83.7 billion on 12 months ago when total debt was £955.8 billion.

The ONS confirmed that borrowing for 2011-12 came in at £119.3 billion, £6.7 billion below the revised forecast from the Office for Budget Responsibility (OBR) of £126 billion.

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