UK public finances suffer as tax revenues fall

Government borrowing rose to £77.3bn in the first six months of the financial year, more than double the debt racked up in the same period last year, as tax revenues tumbled by 10 per cent.

Public sector net borrowing rose by £14.8bn last month, slightly less than economists had expected, but still the biggest increase on record for September

The soaring deficit, which is set to reach a post-war high this year, has come as tax revenues have plunged in the recession, but government spending has risen, partly as a result of the costs of social welfare during the downturn.

Tax revenues in the first half of the financial year were down 10 per cent to £219.1bn from £244.2bn in the same period last year. But current government spending rose 4.8 per cent to £279bn from £266.3bn.

The decline in revenues is slightly more than the Treasury predicted in the Budget, where it forecast an about 7 per cent fall over the year as a whole. But an upturn in the economy over the next few months may well deliver stronger revenues in the second half of the year.

Spending has risen slightly less so far this year than the government expects for the year as a whole, but has been driven up by rising unemployment benefit payments.

In September, the net borrowing requirement was about £6bn higher than its level a year ago, slightly less than in recent months. Figures for earlier months were also revised down slightly.

“These public finances numbers weren’t too bad,” said Neville Hill, economist at Credit Suisse. “With half the financial year now through, the government’s forecast for a borrowing requirement of £175bn in 2009-10 looks realistic and is consequently unlikely to be revised in next month’s pre-budget report.”

“While the September public finance data were not quite as bad as had been feared, they are still poor and do not in any way dilute the need for major long-term corrective fiscal action,” said Howard Archer, economist at IHS Global Insight. “Not only will major, extended public spending cuts have to occur to get the public finances back to a sustainable state, but it seems inevitable that these will have to be accompanied by serious tax hikes as well. “

Over the 12 months to September, net borrowing was £128.4bn compared with £47bn in the year to September 2008.