Shock fall in tax receipts hurts UK debt-reduction plan

Concerns rise that government will miss debt reduction target as July borrowing showed a deficit of £557m, against predictions of a £2.5bn surplus

Britain’s double-dip recession took its toll on public finances last month after a slump in corporate tax receipts unexpectedly pushed the exchequer into deficit.

A sharp fall in manufacturing output added to the gloom following a survey by the CBI that revealed expectations for growth during the autumn have evaporated.

Labour seized on the figures, which it said revealed a huge hole in the governments plans where a growth strategy should be.

Labour’s shadow chief secretary to the Treasury, Rachel Reeves, said the chancellor’s promise to secure the recovery and get the deficit down was in tatters.

“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?”

Shadow business secretary Chuka Ummuna tweeted: “Yet more evidence of the Government’s economic incompetence but will Cameron, Clegg, Cable and co change course?”

The Office for National Statistics said that public sector net borrowing, excluding bank bailouts, showed a deficit of £557m, compared with a £2.8bn surplus in the same month last year. Analysts had been expecting a surplus of £2.5bn.

The data will heighten concerns that the government will miss its deficit reduction target this year – the ONS said the total deficit since April had reached £47.2bn – up £11.6bn on 2011 – excluding financial interventions and a one-off boost after assets from the Royal Mail’s pension fund was transferred to the Treasury.

By next April the chancellor George Osborne could be forced to cope with £30bn of extra debt if the current trend continues, said Alan Clarke of Scotia Capital.

Vicky Redwood, UK economist at Capital Economics, said the figures “continue the deterioration seen over the past few months.

“At this rate, borrowing for 2012/13 overall will massively overshoot the Office for Budget Responsibility’s forecast of £120bn excluding Royal Mail effects by over £35bn.

“And with the recovery falling well short of the OBR’s expectations, we think that the government will struggle to cut borrowing at all next year either.”

July is usually a buoyant month for tax receipts, but this year the corporate sector has been hit hard by the downturn. ONS figures showed North Sea oil and gas output has been unusually low, leading to lower profits and a cut in tax payments.

The impact of a near 20% drop in corporation tax receipts was to push government receipts down 0.8% in July on the same period last year.

Government spending, meanwhile, grew 5.1% on the previous year, mostly on welfare payments.

Lower revenues from oil and gas companies accounted for about £1bn of a £1.7bn shortfall in corporation tax compared with last year.

The government had originally planned to eliminate the structural budget deficit by 2015 with a tough programme of spending cuts and tax rises.

It has eliminated a quarter of the deficit so far, though this figure is in line with Labour’s pre-election target and not the more aggressive plans outlined by George Osborne in the summer of 2010. Osborne has failed to meet his own targets and his tougher austerity programme and weak economy has forced him to extend the planned fiscal consolidation by another two years. Prime minister David Cameron has warned austerity could last until 2020.

Manufacturers responding to the CBI’s monthly Industrial Trends survey pointed to prolonged weakness in the economy. A balance of -21% of firms saying orders falling compared to those saying orders uop represents the lowest return since the end of last year.

The CBI said: “Similarly, export orders have weakened with manufacturers reporting a balance of -17%. While still above the long-run average of -21%, this is the lowest figure reported since January 2012, when it reached -26%.”

Anna Leach, CBI Head of Economic Analysis, said: “The economic environment for UK manufacturers remains challenging, with domestic demand relatively muted and the ongoing Eurozone crisis now seeming to drag on broader global economic momentum.”

Britain’s economy has been mired in recession since late last year, and the government has faced growing calls from international groups, including the International Monetary Fund, alongside opposition politicians to ease the fiscal reins in order to support growth.

A Treasury spokesman blamed a cut in North Sea oil production for the bulk of the fall in corporation tax receipts. He said it was expected that government spending would increase in response to the “weakening global economy” and higher welfare spending, but it was still too early in the financial year to draw firm conclusions about the year as a whole.

“The Government remains committed to the credible plan we have set out to deal with Britain’s debts, and today’s numbers emphasise how risky it would be to deliberately increase borrowing,” he said.

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