Public Finances Ease Some Pressure On Osborne

Better tax revenues and profits from the Bank of England's quantitative easing (QE) scheme helped the public finances record their best surplus for five years in January.

But the £11.4bn figure still leaves the Chancellor George Osborne facing a tough task to meet his borrowing target for the 2012/13 financial year and convince the markets that Britain is worthy of its triple-A credit rating.

The Office for Budget Responsibility (OBR) outlined the nature of the challenge ahead in a statement which said: "To meet our autumn forecast would now require much stronger growth in tax receipts in the last two months of the year than we have seen since December or much lower-than-forecast expenditure by central or local government."

The OBR said that this projection was based on a 2012/13 borrowing target of £119.9bn, which strips out the benefit of any boost from Royal Mail pension assets or transfers of interest income from the Bank of England.

January is a month that traditionally shows a surplus in public borrowing, thanks to seasonal inflows of income and corporation tax revenues.

Total receipts, including taxes, rose 7% or £4.5bn to £65.8 bn - with VAT income rising 4% alongside capital gains and income taxes.

There was a 13% decline in earnings from other taxes such as corporation tax.

But a £3.8bn transfer of funds from the Bank of England - essentially profits through interest from its asset purchases to pump money into the economy - helped ease the borrowing burden and it is expected that there will be a further £2.6bn of interest due by the end of the financial year.

Economists had expected a surplus of £8.7bn for January and the Treasury said the £11.4bn figure showed an improvement in the country's fiscal situation although the way ahead for the economy remained tough.

A spokesman said: "They underline what the governor of the Bank of England said last week: the road ahead will be difficult, but the economy is on the right track."

However Mr Osborne, who has already had to push back his main deficit reduction goal by two years, has been hampered on the borrowing front by a weaker than expected economy which depressed tax receipts and pushed up benefit costs.

Since the start of the 2012/13 financial year, borrowing has now totalled £93.8bn, excluding a one-off boost from the transfer of Royal Mail pension assets.

This is 1.6% higher than at the same point in 2011/12.

The Chancellor had also budgeted for a £3.5bn injection from the 4G auction but it was confirmed on Wednesday that the sale had only raised £2.3bn from mobile providers.

Chris Leslie, Labour's Shadow Financial Secretary to the Treasury, responded to today's figures by calling on Mr Osborne to change course.

He said: "Strip away the smoke and mirrors, like the transfer of cash from the Bank of England, and underlying borrowing so far this year is rising and is £5.3bn higher than the same period last year.

"A flat-lining economy means the Government is borrowing more to pay for economic failure as the welfare bill is up. By failing on growth and jobs, David Cameron and George Osborne are failing on the one test they set themselves - to get the deficit and debt down."

Some analysts have also suggested January's borrowing surplus was flattering.

Martin Beck of Capital Economics said: "Excluding one-offs, underlying borrowing in 2012/13 is still likely to come in three to £5bn above the OBR forecast of £119.9bn.

"So with borrowing still very high and fiscal progress appearing to have ground to a halt, the dilemma faced by the Chancellor at next month's Budget over whether to tighten fiscal policy, or loosen and go for growth, remains acute."

Chris Williamson, chief economist at Markit, estimated an overshoot of up to £10bn and warned that the UK's AAA credit rating was "looking increasingly at risk".

He said: "The spring Budget will need to address the concern that more stimulus is needed besides central bank action in order to get the economy on a sustainable recovery path.

"Without a credible plan from the Government to break the vicious circle of a sluggish economy, low tax revenues and rising public sector borrowing, the credit rating agencies are likely to lose their patience."

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