Deficit warning despite improved borrowing figures
By Alex Stevenson
Concerns about George Osborne's deficit reduction plan are continuing, despite improved borrowing figures.
The Office for National Statistics said this morning that public sector borrowing was down by over £16 billion on last year, with tax receipts partly boosted by the increase in VAT to 20%.
With financial sector interventions excluded, debt increased by £1.5 billion in the first two months of the 2011/12 financial year – during which the Treasury plans to cut the deficit by just over £20 billion.
"Government finances moved in the right direction in May, but there's a lot of work to be done if the target of a £20 billion reduction is to be achieved this financial year," Markit chief economist and director Chris Williamson said.
"The data so far this year raise a concern that, rather than reducing the public debt, the deficit reduction plans could be having the opposite effect because higher tax rates and austerity measures are causing economic growth to be weaker than expected."
Philip Shaw, economist at Investec, said the May numbers were broadly in line with expectations.
But he added: "That still leaves progress during the full year so far as disappointing. It's early days, but we would be hoping to see more positive effects of the spending cuts coming through in the figures."
Their concerns will encourage Labour's warnings that the chancellor's policies are damaging rather than hurting the economic recovery. GDP growth has been broadly flat in the last nine months.
Angela Eagle MP, Labour's Shadow Chief Secretary to the Treasury, said in response to today's public borrowing figures:
"While George Osborne's deep cuts and tax rises have now started to kick in these disappointing figures show the Government actually borrowed more in the first two months of this year than the first two months of last year.
"As we have consistently warned, cutting too far and too fast risks a vicious circle," shadow chief secretary to the Treasury Angela Eagle said.
"The slower growth and higher unemployment George Osborne's policies have delivered since his first Budget a year ago are making it harder to get the deficit down."
Mr Osborne struck a defiant note as he addressed the issue in the Commons' Treasury question time this afternoon.
He said the figures showed the British government was "on track in reducing the deficit" and added, referring to the situation in Greece: "On a day like this, in a week like this, for the other side to be saying we abandon our credible deficit reduction plan shows how out of touch they are with what is going on in the world today."
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