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Last Updated: Tuesday, 20 June 2006, 09:26 GMT 10:26 UK
UK budget deficit hits new record
UK Chancellor Gordon Brown
Gordon Brown says the UK's finances are in order
The UK has posted a record budget deficit for the public sector in May.

The May current deficit was 8.7bn, 1bn higher than a year ago, the Office for National Statistics (ONS) said.

Public Sector Net Borrowing (PSNB) - which includes capital investment - showed a deficit of 10bn, the second highest figure on record.

Rising government spending was mainly responsible, the ONS said, although lower corporate tax receipts also contributed.

Another measure of public borrowing, the public sector net cash requirement, reached 7.4bn, 2.3bn higher than one year ago, and the highest for May on record.

Finance worries

Overall spending by the public sector rose 3.1% from a year earlier, with central government spending rising even faster - 7% on an annual basis.

The public finance figures provided a nasty surprise for the chancellor
Howard Archer, Global Insight economist

The lower income from corporation tax came from changes in the pattern of payment, with some companies paying in January instead of April.

But the figures were much higher than economists had expected.

In the first two months of the fiscal year which began on 6 April, government borrowing (PSNB) has reached 10bn.

In his March budget, Chancellor Gordon Brown had predicted that borrowing would fall from 39bn to 36bn this year.

"May's UK public finances figures put something of a dent in recent hopes that public borrowing had finally embarked on a downward trend," said Jonathan Loyne, UK economist with Capital Economics.

"While it is still very early days, the figures do not support the chancellor's Budget forecasts that PSNB will fall."

The Treasury, which has been criticised over the level of public borrowing, insists it will continue to meet its fiscal rules.

'Tight grip' needed

Public sector net borrowing for the past fiscal year was 38.9bn, higher than the Treasury's 37.1bn forecast, and economists are sceptical of Gordon Brown's forecast that the level will fall to 36bn this year.

"The public finance figures provided a nasty surprise for the chancellor," said economist Howard Archer of Global Insight.

"A very tight grip on public spending will be needed to restore sound, sustainable public finances and this may yet have to be complemented by significant tax hikes."

High levels of borrowing may force the government to take unpopular measures, either scaling back on spending plans or raising taxes, as it attempts to keep its finances under control, analysts said.

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