Page last updated at 12:27 GMT, Thursday, 19 March 2009

UK budget deficit widens further

10 notes
The government is having to borrow heavily

The UK's deficit widened to £8.99bn in February, a record level for the month, official data has shown.

This was eight times the figure seen a year earlier, as tax receipts fell 10% causing the government to borrow more.

As unemployment has risen and firms have seen profits fall this has hit the money government collects in taxes.

The cumulative deficit for the fiscal year is £75.2bn, increasing the chance that government borrowing for the year will exceed its own £77bn forecast.

The total government debt is equivalent to 49% of gross domestic product.

Philip Shaw, an economist at Investec, said the deficit was slightly wider than expectations.

The chancellor will certainly overshoot the borrowing target for the current financial year
Peter Spencer, Ernst & Young Item Club

"In the medium term, the escalation of public borrowing is of great concern. Over the next couple of years, there is going to be a significant pressure being placed on capital markets," he said.

Mr Shaw said public borrowing could be in the region of £150bn next year, which longer term would be "unsustainable".

Bailing out banks

As well as lower tax receipts from companies and individuals, the UK's finances have also been hit as the government spends money to boost the economy, including the bail-out of ailing banks.

Last month the Office for National Statistics (ONS), which publishes the borrowing figures, said the debts of Royal Bank of Scotland and Lloyds Banking Group would be included in the public finances since the government took stakes in the firms.

This could add between £1tn and £1.5tn to public sector debt.

Following the release Peter Spencer, chief economic advisor to the Ernst & Young Item Club, said outlook was bleak.

"The Chancellor will certainly overshoot the borrowing target for the current financial year, and it will take much longer than he expects to correct the massive deficit being racked up," he added.

Vince Cable, Treasury spokesperson for the Liberal Democrats said "it is clear that the Government's temporary VAT cut has done nothing to stimulate the economy, while pushing the public finances further into the red".

In last year's pre-Budget report, the government announced a temporary cut in VAT to 15% from 17.5%, which is set to last until 31 December 2009.

Manufacturers suffer

A further sign of the weakness of the UK economy came from the latest CBI industrial trends survey.

It showed manufacturers' order books fell to a 17-year low in March as domestic and export orders dropped.

"UK manufacturing activity has not so much fallen off a cliff, but off Mount Everest," said Howard Archer, chief UK and European economist at IHS Global Insight.

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