Page last updated at 10:12 GMT, Friday, 18 September 2009 11:12 UK

Public sector borrowing soaring

People outside a Job Centre in London
Rising unemployment has dented tax revenues

The UK's public sector net borrowing totalled £16.1bn last month, official figures have shown.

The figure, an August record, compares with £9.9bn a year ago but is less than some forecast. It came as the recession has bit into government tax receipts.

The rise takes net borrowing to £65.3bn for the five months of the financial year so far, according to the Office for National Statistics (ONS).

The government's overall debt now stands at £804.8bn, or 57.5% of GDP.

That represents an increase of £172bn in the past year - though more than £140bn of that is accounted for by banking sector bailouts.

Jobless impact

Chancellor Alistair Darling has forecast that public sector net borrowing will reach a record £175bn this year as the finances are hammered by recession.

However Jonathan Loynes of Capital Economics said that at the current rate of spending, borrowing would overshoot this forecast by £50bn.

Tax revenues have suffered as businesses make fewer profits, and rising unemployment hits income tax revenues.

Even if the UK economy starts growing again… the public finances are not going to magically return to health overnight
Colin Ellis
European economist, Daiwa Securities

The temporary reduction in the rate of Value Added Tax, a measure aimed at stimulating the economy, saw VAT takings down 16.2%.

Government spending during August was £45.6bn - with an increase of £900m on unemployment benefits.

Earlier this week, figures showed unemployment rose by 210,000 to 2.47 million in the three months to July, the highest level for more than 14 years.

'Pretty awful'

The figures come amid clashes between political parties over cuts in government spending - with Mr Darling beginning a series of meetings with cabinet colleagues to identify possible public spending cuts.

"The truth is that these are pretty awful figures, but they are predictable," said BBC chief economic correspondent Hugh Pym.

"How to deal with it in the years ahead is a big debate."

The British Chamber of Commerce said it welcomed political leaders talking openly about the need to make spending cuts but said that "wealth-creating" businesses must not be damaged.

"While painful choices are unavoidable, unless the business sector is nurtured and encouraged to take the economy out of recession, the country will face serious risks of further declines," BCC chief economist David Kern said.

There have been some indications that the UK is coming out of recession, but analysts say that with households being careful about spending and unemployment still rising, any recovery will be gradual.

"The problem is, even if the UK economy starts growing again… the public finances are not going to magically return to health overnight," said Colin Ellis, European economist at Daiwa Securities.

Economic group the CEBR said the fact that August borrowing was less than many had predicted was "a sign of the extent to which expectations have adjusted to the new realities, rather than any real improvement in the outlook".

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