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Record public sector borrowing in August

Public sector borrowing reached £15.9bn in August, which was a record figure for the month. This compares with £14.1bn in the same month last year. The current budget deficit which shows the difference between government spending and income rose by £2.3bn to £13.3bn.

This is not very good news on the surface, and gives added reason to the chancellor to put his severe spending cuts into place.

But why did net borrowing increase last month? There were two main reasons for this. Firstly, higher inflation has led to a rise in interest payments on index-linked government bonds. This cost an extra £1.3bn last month. On top of this there was a rise of £800m in social benefits payments.

There was some good news that tax receipts in August increased by £2.2bn to £37.1bn, but spending increased by £4.9bn to £49.8bn. Tax receipts were up 6.3% on the previous year but that is considered to be disappointing by many commentators.

However, between April and August, cumulative borrowing is £3.8bn below the same period last year, and the chancellor’s forecast of net borrowing of £149bn in this fiscal year still looks likely to be met, compared to the previous year’s total of £155bn.

A spokesman for the Treasury said: “Today’s borrowing figures demonstrate just why the Government needs to tackle the deficit.” He also said: “If the government had not announced decisive action to bring borrowing down, debt interest would have been over £65bn by 2014-15, more than is spent on schools or defence.”

The problem is that there are parts of spending which cannot be cut. So, as the government trims the public sector there will be a direct effect upon increased unemployment. But as private firms that sell to the public sector lose their contracts, they will have to fire workers as well. All this increased unemployment will mean increased benefits and more government spending on welfare. Of course, they could always slash benefits as well.

On top of this these former workers will not be paying tax, so government revenues will be constrained. On top of this the unemployed will be spending less. If consumption falls firms will have to cut back on their workforces and on their investment spending. Where then is the incentive for economic growth?

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Posted in Consumer Expenditure, government borrowing, government spending, Inflation, Interest rates, Public Finances

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