Record public debt means UK could be next Greece

ECONOMIC experts last night warned that the UK was on track to run up a higher budget deficit than Greece, after official figures showed net public sector borrowing in January went into the red for the first time on record.

Net borrowing was 4.3 billion in January, a month that usually sees a seasonal surplus as a result of an upsurge in revenue from income and corporation tax at the beginning of the year.

The January deficit recorded by the Office of National Statistics was the first since records began in 1993 and represented a severe blow to Prime Minister Gordon Brown's hopes that he will be able to go into the election trumpeting some form of economic recovery.

The figure led to experts warning that the government is failing to do enough to deal with the debt problem and even led to a prediction that the UK's deficit would overtake Greece's when expressed as a percentage of gross domestic product.

Even in the troubled financial climate, yesterday's figures came as a surprise, given that economists had predicted a surplus of about 2.8bn. For the ten months of the 2009-10 financial year so far, public sector net borrowing has now reached 122.4bn.

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Despite the bad news, a Treasury spokesman maintained that the government was on track to meet its Pre-Budget Report (PBR) forecast for public sector borrowing in 2009-10. Chancellor Alistair Darling predicted in last year's PBR that public sector net borrowing for 2009-10 would peak at 170bn this year (the equivalent of 12.6 per cent of GDP).

"The PBR predicted a sharp decline in self-assessed capital gains tax and income tax receipts paid this financial year on gains and earnings from 2008-9. With January being the most important month for these receipts, that fall is evident in today's figures," a Treasury spokesman said.

But the Treasury analysis was disputed by Jonathan Loynes, chief European economist for Capital Economics who warned that the UK was in line to overtake Greece's deficit. He said: "Extrapolating the trend forward now points to a full-year borrowing figure of about 180bn, some 10bn higher than the Chancellor's Pre-Budget Report forecast of 170bn on this borrowing measure. This would be the equivalent of around 12.8 per cent of GDP, just in excess of Greece's 2009 deficit of 12.7 per cent."

Mr Loynes added: "January's UK public finances figures have further underlined the need for more decisive action to improve the fiscal position when the economy is strong enough to withstand it."

The overall net debt was 848.5bn for the UK, equivalent to 59.9 per cent of GDP.

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Andrew Goodwin, the senior economic adviser to the Ernst & Young ITEM Club, described the figures as "pretty ghastly".

He said: "January usually yields a healthy surplus, due to receipts from corporation tax, and even in the current climate it is surprising to see the government rack up a deficit.

"If this overshoot is replicated in February and March, the Chancellor's full-year forecast will certainly be under threat."

Tax receipts fell 11.8 per cent compared with January last year, when the government was able to repay 5.3bn even though the country was deep in recession.

Mr Darling has pledged to halve the deficit in percentage terms over the next four years, but earlier this week a group of 20 economists said action needed to be taken sooner.

The shadow chief secretary to the Treasury, Philip Hammond, called the latest figures "appalling", adding that total UK borrowing so far this year was equivalent to 4,800 for every family.

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Business groups called for "a credible plan" from the government to curb the deficit. The British Chambers of Commerce warned that a failure to act quickly was putting the UK's credit rating at risk.

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He will also attack the "narrow nationalism" of the British Conservatives, saying they would leave the UK facing "isolation and irrelevance" in Europe, according to extracts released by Labour Party aides.