UKIFP

Last month Britain slumped another 10.3 billion in to the red despite a leap in business tax and VAT revenue.

According to the Office for National Statistics (ONS) Net borrowing set a record high for the month of October and marked an increase on the 10.1 billion last year.

The rise came in spite of signs of recovery boosting government tax returns, with corporation tax revenues up 29% and VAT higher as shoppers attempt to beat January’s increase in VAT to 20%

October has traditionally been seen as a strong month for taxes and some economists had predicted borrowing to fall year on year.

The 10.3 billion excludes the impact of financial intervention by the Government has taken this financial years borrowing to £81.6 billion.

The ONS revealed revisions to borrowing  were down £14.1 billion in August and £15 billion in September, giving hope that the Government is on track to remain within the Office for Budget Responsibility forecast £149 billion for the year 2010 – 2011

Borrowing in October saw Britain’s Budget deficit increase by a further £7.1 billion last month.

Net debt is currently 845.8 billion, representing 57.1% of GDP, another record for October.

These figures will reinforce the governments argument to cut public spending dramatically as announced last month in the Comprehensive Spending Review (CSR)

While revenue from tax is increasing and unemployment falling easing the pressure on benefits, some economists have said that the government is battling against the increasing interest payments on its massive debt.

The figures for last month including the financial interventions that have reduced overall borrowing due to increased profits from the part-nationalised banks was £9.8 billion, an increase on the 9.4 billion seen a year ago.

While the amount borrowed in October was slightly more than expected the significant downwards revision in recent months has meant that the year to date has been lower than forecast levels.

Chief economist at IHS Global Insight, Howard Archer, estimated that financial year borrowing would reach £145 billion – less than the Chancellor George Osborne’s target.

He warned that interest payments posed a serious problems although efforts to reduce the deficit and the economic recovery will help bring down further borrowing.

The breakdown of central government expenditure shows interest payments were up to £3.86 billion in October from £3.35 billion a year earlier.

A spokesman for the Treasury said UK finances were “out of the financial danger zone”, but added today’s borrowing figures “make clear exactly why we need to tackle the unprecedented borrowing the Government faces”.

Britons faced another above-target increase in the cost of living last month as a rise in fuel prices sent inflation to 3.2%.

The increase in the Consumer Prices Index (CPI) rose 0.1% from Septembers 3.1% forcing the Bank of England Governor Mervyn King to write another report to the Chancellor explaining why inflation is so far above the 2% target.

According to the National Office for Statistics the Governments tax on fuel at the beginning of October is the main reason for CPI increase. The Office for National Statistics reported that petrol prices rose by 2.1p a litre between September and October, while beer, wine and tobacco also increased. Computer games bought on the high street were also driving a record rise in inflation for recreation and culture products.

However there was relief for consumers on food bills which were helped by lower vegetable and meat prices, with pork especially cheaper due to healthy stock levels.

House prices have been falling in recent months, while they were rising this time last year

The falling property prices sent the Retail Prices Index (RPI) measure of inflation down to 4.5% in October from 4.6% in September.

Mervyn King has now submitted four reports in a row to the Chancellor. The Governor of the Bank of England has to publish an open report if CPI is more than 1% above the 2% target and thereafter every three months if it fails to drop back.

The CPI is back to the level it was in June having remained above target since November last year.

There is expected to be further pain to come for households, with the Bank warning in its latest forecast report that higher household bills and the impending VAT rise in January could see CPI spike to 3.5% over the coming months.

CPI inflation is expected to remain above target, and at a somewhat higher level than expected three months ago, for a period of a year or so. Over the next few months the inflation rate might rise further.

The impending 20% VAT due in January alongside higher fuel and energy costs plus the impact of a weak pound are set to drive inflation even higher.

In its quarterly report last week the bank predicted that CPI could reach higher than 3.5%. However Mervyn King expects that slack in the economy after the recession would outweigh inflationary pressure.

He reported to the Chancellor: “The Monetary Policy Committee’s central view remains that spare capacity within companies and in the labour market will continue to put downward pressure on inflation.As the temporary effects of VAT increases and higher import prices dissipate, inflation is expected to fall back towards the target.”

His letter comes after official figures showed Consumer Prices Index (CPI) inflation rose to 3.2% last month from 3.1% in September.

The Chancellor George Osborne said he noted the Bank’s view that inflationary factors were temporary, but stressed the Monetary Policy Committee’s remit “ensures vigilance on upside and downside risks”.

The Bank of England today chose not to prop up the economic recovery with another round of emergency measures.

Despite fears surrounding the Government’s deficit-busting spending cuts announced last month, policymakers held interest rates at an historic low of 0.5% and resisted pressure to pump more cash into the economy.

But the Bank is also battling against stubbornly high inflation, which remained at 3.1% in September – well above the Bank’s 2% target.

The pound strengthened after today’s decision, hitting its highest level against the dollar since January at 1.62. This also takes into account the severe weakening effect the Fed’s QE2 package has had on the greenback.

More details on rates decision and the MPC voting result will be made public on November 17 when the minutes are released.

Howard Archer, chief European and UK economist at IHS Global Insight, said sticky inflation and decent economic activity would have made most MPC members reluctant to vote for further QE “for now at least”.

He said: “Nevertheless, despite recent resilient economic data and surveys, serious concerns and uncertainties remain about the economy’s future strength with the substantial fiscal tightening set to increasingly kick in over the coming months, including January’s VAT hike.”

Philip Shaw, chief economist at brokers Investec, said: “While we would not totally disregard the possibility of further QE at some point, the MPC will still be nervous about high prevailing rates of inflation and the possibility that these become entrenched over the longer-term.

“Recent brighter news on the economy would probably have to swing sharply into reverse to prompt the committee to restart QE.”