Public borrowing still a little ahead of expectations

It is early days yet, but the chancellor does not appear to making quite as much progress as he hoped in reducing public sector borrowing. The latest figures (pdf), released by the Office for National Statistics today, show public sector net borrowing (excluding the effects of financial interventions) was £17.4 billion in May, compared to £18.5 billion in May 2010.

This decline is good news, but not quite good enough to reverse April’s very bad figures. As a result, borrowing in the first two months of the financial year was £27.4 billion, £1.5 billion higher than in the same two months of 2010/11.

However, receipts in April were boosted by £3.5 billion thanks to the bank payroll tax. After adjusting for this one-off tax, borrowing in the current year is £2 billion lower than last year. This still suggests that borrowing is running a little ahead of where is should be if the full-year outturn is to be in line with expectations. At the time of the March Budget, the Office for Budget Responsibility forecast a drop in borrowing from £143.2 billion in 2010/11 to £122 billion in 2011/12. But the overshoot is not a large one – and the figures are volatile from month-to-month.

Some commentators have blamed weak growth in the economy for the overshoot in public borrowing, but this explanation is too simplistic. Both receipts and expenditure appear to be growing more strongly than expected, which would not be the case if growth was the problem. It is more likely that higher than expected inflation has boosted spending a little more than receipts and that this is the main reason for the overshoot.