UK October budget deficit widens

Higher unemployment will mean higher benefit bills

Public sector net borrowing increased in October by £1.4bn in a further sign of deteriorating government finances.

Public sector net debt rose to £640.9bn, or 42.9% of GDP, following the government takeover of Bradford and Bingley on 26 September.

In the first seven months of the year, net borrowing has reached £37bn, not far from the Treasury forecast of £43bn for the whole year.

Public borrowing was £3.1bn higher this month than in October 2007.

Corporate tax

Normally, the government runs a surplus in October as quarterly corporate tax receipts flow in.

Corporate tax receipts were broadly unchanged at £9.6bn, but nearly half the payment was from North Sea oil companies, double the amount in previous years.

That was based on the high oil prices in the summer which have now fallen back sharply. Financial corporation tax receipts were sharply down.

Government spending, including spending on benefits and interest payment on debt, was higher than in the same month one year ago.

"The chancellor's aim back in the March budget to keep public borrowing down to £43bn in 2008/09 has long been blown out of the water big time," said Howard Archer of Global Insight.

Pre-Budget report

On Monday, Alistair Darling will reveal his new forecast for the budget deficit in the pre-Budget report.

He will have to pencil in at least £60bn for public sector borrowing figure this year, as rising unemployment and and a slowing economy squeeze government tax revenues.

But it could well turn out to be much higher than that, if reports of a further stimulus package of up to £15bn-£30bn turn out to be correct.

The figures suggest that the government will have to revise or abandon its fiscal rules, which aimed to keep government borrowing (excluding investment) in balance over the economic cycle, and to keep overall government debt below 40%.

Many experts believe that the budget deficit will get even worse in the future.

"The outlook for the public finances over the next three years also seems very bleak," said Gemma Tetlow, an economist at the independent Institute for Fiscal Studies.

Fragile economy

The gap in government revenues comes as the UK economy is set for its biggest slowdown since at least the 1990s, when the budget gap rose to 8% of GDP.

The UK economy contracted by 0.5% in the three months to September, and most forecasters, including the Bank of England, are expecting it to continue to decline through 2009.

The slowing economy will mean higher expenses for the government on benefit payments, which have just been increased for inflation based on the Retail Prices Index rate in September, when it reached 5%.

"Now that the economy is heading into recession we expect borrowing to rise steeply," said Andrew Goodwin, economic advisor to the Ernst & Young ITEM Club.

"Had the government been more disciplined when times were good it would have more room for manoeuvre now."

Both the Bank of England and the Treasury have said they are ready to take further action to boost the economy, as part of the strategy of global coordinated action agreed at the G20 summit in Washington last week.