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Last Updated: Wednesday, 20 July 2005, 11:02 GMT 12:02 UK
Budget woes deepen for chancellor
Chancellor Gordon Brown
The iron chancellor's iron grip seems to be slipping
Government borrowing in the UK has risen to its highest June level to date, putting more pressure on the chancellor's spending plans.

The public sector net cash requirement was 12.3bn, the highest figure for that month since records began in 1984.

The figures come a day after Chancellor Gordon Brown announced changes in the way he will measure the budget deficit.

And they indicate that the chancellor may have a tough time meeting his budget forecasts for the year.

'Creative accounting'

The current account budget deficit of 4.7bn was 1.2bn higher than the deficit in June 2004, while the public sector net borrowing figure of 5.9bn (the government's preferred measure) was 1.5bn higher on the year.

It is likely that the public finances may get some relief in later months of the financial year
Douglas McWilliams, CEBR

"These are another set of weak public finance figures, which highlight the need for the chancellor to come up with yesterday's creative accounting," said Howard Archer, economist at Global Insight.

Other forecasters suggested that Mr Brown might be facing a budget gap of 40bn-50bn by next April, compared with the budget forecast of 32bn.

The chancellor has said that current borrowing would fall by 12bn this year - but so far, after three months, it is 2bn higher.

The slowing economy is reducing his tax revenues while government spending is still planned to rise.

Changing the goalposts

The Treasury is planning to stretch the economic cycle to nine years.

This effectively allows Gordon Brown to avoid breaching his "golden rule" on balancing the budget over the cycle.

On Tuesday, Gordon Brown announced he was pushing back the start of the current economic cycle by about two years from 1999 to 1997.

This means he will now be able to include an extra 12bn worth of surpluses to offset deficits recorded over the last couple of years.

However, researchers at the independent think tank the IFS say that he may also have to extend the economic cycle forward into 2006-7 if economic growth falls below expectations.

And while the Treasury is predicting a small surplus in 2006-7, the IFS and other forecasters a projecting a deficit.

Tax rise fears

IFS senior researcher Christine Frayne said that it was likely that the chancellor would have to raise taxes in next April's budget despite his redefinition of the economic cycle.

But other commentators think that he may be bailed out by higher oil prices.

"However, it is likely that the public finances may get some relief in later months of the financial year when increased oil revenues from the current high oil price feed through," said Douglas McWilliams, chief executive of the Centre for Economics and Business Research.

But Mr McWilliams said the figures increase the probability of tax rises, while indicating that short term interest rates are even more likely to drop.

Borrowing figures are known to be volatile and often subject to revisions, meaning the underlying picture may be brighter, other analysts said.

"The borrowing numbers are worse than a year ago. It would tend to suggest the public finances are deteriorating but we are reluctant to conclude that from the numbers," said Philip Shaw at Investec Securities.

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