The July figures for public borrowing were disappointing. The government borrowed an additional £600m in a month when revenues are traditionally strong. The deficit in July 2012 was £3.4 billion higher than in 2011.
There are two very simple reasons why borrowing was up. The first is a fall in tax revenues. They collected £0.4 billion or 0.8% less than in July 2011 in cash terms. Allowing for the current inflation rate of 3.2% (RPI) this is a considerable real fall.
The second is the continuing growth in spending. Current spending was £2.4 billion or 5.1% higher than in July 2011. It confirms the pattern of considerable real increases in current public spending, even after allowing for 3.2% inflation. Given the fact that a public sector pay squeeze is in place, the real increase should be more than this implies. Government investment spending also rose by £0.6bn or 33% on the low July 2011 base.
If the government keeps increasing spending at this rate, there will be too much borrowing. Tax revenues from self assessment income tax and capital gains tax are falling because the government has set uncompetitive rates. The Chancellor wisely changed his tax regime for oil and gas in the latest budget, following the fall off in activity last year from higher taxes. He needs to review all taxes with a view of maximising revenues by setting competitive rates.