Osborne's deficit reduction plans in jeopardy

The chancellor’s budget deficit reduction plans hang in the balance ahead of the release of official public sector net borrowing figures.

George Osborne’s hopes of reaching his full-year goal for reducing the deficit could be dashed when the Office for National Statistics (ONS) reveals its figures for March.

It is expected to show that public sector net borrowing excluding financial interventions, bank bail-outs for example, fell by £2bn from last March to reach £16bn.

Should this forecast be accurate, borrowing for the year to the end of the month would stand at £126bn, in line with the Office for Budget Responsibility’s (OBR) forecast and below last year’s figure of £136.8bn.

But Capital Economics economist Vicky Redwood has forecast borrowing for March will be £18bn, which would be the same level as last year and mean Osborne has missed the target level by £2bn.

Redwood warned that borrowing could even exceed last year if public sector spending has been pushed up by departments using up their budget before the financial year comes to a close.

“Of course, the big picture is still that borrowing in 2011/12 will have been much lower than the £137bn seen in 2010/11,” said Redwood. “Nonetheless, we think that it will be hard to make further downward progress if the economic recovery stumbles again as we expect.”

February struck a blow to the government’s deficit reduction plans when it showed a £15.2bn rise in net borrowing, a record for the month and above the £8.9bn borrowing from the previous year.

The UK’s economy was in danger of falling into recession and spending came in higher than expected, while tax returns were weaker than had been hoped.

However, the government has generally been successful in reducing the deficit.

Investec economist Philip Shaw expects the government’s plans to be on course in the month, predicting borrowing of £14.6bn for March, lower than the OBR’s full-year target.

Shaw said: “Providing the economy gains some momentum, there should also be an improvement in the underlying fiscal position this year, albeit a modest one.”

The figures come at a crucial time for the Conservative-led government, which is trailing Labour in the polls after an unpopular Budget and ministers mishandling the threat of a fuel strike.