Borrowing figures prompt co-ordinated growth push across Whitehall

Plans include liberalising planning laws, guaranteeing more house building and shaking up roads spending

The government is to unveil a series of measures to promote jobs and growth as ministers move to show they have a credible economic strategy after a slump in corporate tax receipts led to higher than expected borrowing last month.

Amid growing fears among senior figures in both coalition parties that George Osborne is running out of time to meet his pledge to stabilise the public finances, Whitehall sources spoke of a co-ordinated growth push across the government in September. There will be a particular focus on liberalising planning laws, guaranteeing more housebuilding and boosting infrastructure projects.

In a sign of the government’s radical thinking, ministers are drawing up plans to reform the Highways Agency so it can borrow money to pay for a “horizon shift” in spending on roads to boost the economy and reduce congestion and delays.

The agency, which runs the strategic network of motorways and A-roads, could be made more independent, most probably as a government-owned company or public trust, so it can borrow large amounts without increasing the public deficit.

“We have already made a lot of growth announcements,” one government source said. “But obviously the garden needs watering often.”

The moves to burnish the government’s pro-growth approach came as a sharp fall in tax receipts last month led to a £557m deficit in public sector net borrowing. This compared with a £2.8bn surplus in the same month last year and was way below the £2.5bn surplus expected by analysts.

The Treasury blamed a cut in North Sea oil and gas production after a fire at the Elgin platform deprived the exchequer of around £1bn in tax receipts, nearly half of the £1.7bn shortfall in corporation tax. But the Institute for Fiscal Studies warned that Osborne may fail to meet the forecast by the Office for Budget Responsibility (OBR) that borrowing will fall from £125bn last year to £122bn this year.

The borrowing increase sparked unease in both coalition parties. Lord Oakeshott of Seagrove Bay, the former Lib Dem Treasury spokesman who last month dubbed Osborne the “work experience” chancellor, said: “How much more evidence do we need that boy soldiers firing pop guns at our recession won’t work? Now we need two big bazookas – making the banks lend, with RBS nationalised, and building 100,000 more houses a year, led by desperately needed social house building.”

From the right the former Tory cabinet minister John Redwood called for tax cuts and spending cuts after the OBS figures showed government spending in July grew by 5.1% on the previous year, mostly on welfare payments. Redwood wrote on his blog: “If the government keeps increasing spending at this rate, there will be too much borrowing. Tax revenues from self assessment income tax and capital gains tax are falling because the government has set uncompetitive rates. The chancellor wisely changed his tax regime for oil and gas in the latest budget, following the fall off in activity last year from higher taxes. He needs to review all taxes with a view of maximising revenues by setting competitive rates.”

Treasury sources said the increase in borrowing was largely explained by the fall in corporation tax receipts, 75% of which was due to a slump in North Sea revenues. They pointed out that the three main sources of tax revenue – VAT, income tax and national insurance – are on track or ahead of OBR forecasts.

“It is a very difficult environment because the global economy is weak,” one source said. “We have to hold our nerve and stick to our plan.” Osborne will be waiting to hear whether the OBR decides the fall in tax receipts is temporary, or cyclical, or if it is structural. “If it is permanent then there will be adjustments,” a Treasury source said.

The chancellor may have to extend the planned spending cuts beyond the extra two years he announced in last year’s autumn statement. He may also embrace deeper cuts, including a controversial extra £10bn in welfare spending reductions which the work and pensions secretary, Iain Duncan Smith, is resisting.

This will not amount to a rewriting of the chancellor’s “fiscal mandate” on the deficit because this is assessed on a rolling five-year basis, which means that no definitive judgment ever needs to be made. If the OBR decides the fall in tax receipts is permanent the chancellor could run into trouble on the second part of his mandate – ensuring that debt as a share of GDP is falling by 2015-16.

Labour said the increase in borrowing showed that the chancellor’s strategy was failing. Rachel Reeves, the shadow chief secretary to the Treasury, said: “This is a damning indictment of a chancellor who promised to secure the recovery and get the deficit down. His failed plan has delivered the exact opposite – a double-dip recession which is leading to soaring borrowing. What more evidence does the government need that their plan has failed and they need to change course?”

The government will take the first steps in outlining its latest plans to promote growth on Thursday when it publishes a report on housing by Sir Adrian Montague. This is expected to say the government needs to support the industry by lending publicly owned land to developers and relaxing requirements for building schemes to include social housing.

Housing will be at the top of the list of growth announcements next month as ministers outline a guarantee on house building. Planning laws will be liberalised, though Tory sources said there would be no threat to the green belt.

The plans to reform highways funding, proposed by David Cameron in March, are part of more long term thinking. A key reform will be in funding a new body to pay for ongoing operations and service its debts. Options range from more shadow tolls, under which government pays road builders for every vehicle mile travelled, or replacing annual grants with five-yearly government commitments, to allowing the strategic roads operator to claim some of the VED revenue or charge tolls where it makes improvements.

Stephen Glaister, director of the RAC Foundation transport policy group, said: “If they are going to do more stuff, maintained to a better standard, more money is going to have to be spent. There are only three places the money can come from: the exchequer, mining some of the new tax vehicles local authorites are getting…or net new charges to users — in other words tolls.”

Stephen Joseph, chief executive of the Campaign for Better Transport, said: “It’s clear that ministers are now casting around for anything that might produce growth without thinking of the long-term consequences or value for money for taxpayers. The proposals risk becoming a real mess that will prove just as big a waste of public funds.”

A feasibility study by the Department for Transport and the Treasury is due to report to the prime minister this autumn. In a sign they are serious about making the Highways Agency more independent, Greening has already asked officials to work up plans for more independent regulation of the roads operator and for a model of cutting costs each year by a figure dictated by both the size of the asset base and inflation — both modelled on the railway industry.

Civil servants have also been instructed to prepare a five year statement of what services they want the Highways Agency or its successors to deliver, again modelled on the high level output statements the department publishes for the railway.

Another plan ministers might consider is to split the Highways Agency into regional bodies, a model some believe would have been better for the railway industry when it was first privatised.

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