Deficit-busting plans under strain

Chancellor George Osborne's deficit-busting plans have been put under strain after official figures revealed a larger-than-expected surge in government borrowing.

Public sector net borrowing, excluding financial interventions such as bank bailouts, was £17.9 billion in May, up from £15.2 billion the previous year, the Office for National Statistics (ONS) said. City analysts had expected borrowing of £15.7 billion.

The jump was driven by a plunge in income tax receipts and a rise in welfare benefits, underlying the impact of the double-dip recession on the public purse.

Some economists warned that the Chancellor was already on course to significantly overshoot his full-year borrowing target of £120 billion, while others said the country's prized AAA credit rating was under threat.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The Chancellor desperately needs the economy to quickly return to growth, or else he faces suffering a significant shortfall on his public finance targets and a growing threat to the UK's AAA credit rating which is so prized by the government."

But the Treasury insisted that it was too early in the financial year to draw conclusions about the year as a whole. A spokesman for the department said: "The Government is committed to dealing with the deficit, which will help keep interest rates lower for longer and support millions of families and businesses across the country."

Mr Osborne is in the process of rolling out a series of tough austerity measures in a bid to cut the budget deficit, which include billions of pounds of spending cuts and hundreds of thousands of public sector job losses.

He says the country's gold-plated credit rating, which is being used to back lending schemes for businesses and households, is protected by the government's commitment to austerity.

But the economy fell back into recession in the first quarter of the year, which has significant implications for tax revenues, while high levels of unemployment are increasing the burden on the state.

Vicky Redwood, chief UK economist at Capital Economics, said: "The main problem remains a sharp slowdown in tax receipts. And with the economy probably still in recession, receipts are likely to remain weak. The combination of worsening public finances and renewed recession is likely to intensify calls for the Government to change tack on its austerity programme."