Unexpected figures show austerity is not working

LONDON BRIEFING:AUSTERITY CLEARLY isn't working but another, more savage, round of cuts may be on the way this autumn after shock figures yesterday showed the deficit is on course to overshoot government targets by a massive margin.

July is traditionally a month when corporation and income tax receipts roll into the Treasury’s coffers, producing a sizeable surplus instead of the usual deficit.

A year ago, the July surplus was £2.8 billion (€3.54 billion) and this time round analysts were forecasting £2.5 billion; after all, we are in a double-dip recession and a fall was only to be expected.

So there was a sharp intake of collective breath in the City of London when the figure emerged at £577 million – preceded by a minus sign rather than a plus.

Behind the unexpected deficit is a sharp fall in corporation tax receipts which reflects, in part, a drop in North Sea oil and gas output after the Elgin platform leak.

But the figures also underline the damage being done to the economy by the extended recession. And, despite all the talk of austerity and cuts, government spending actually rose by 5.1 per cent last month, thanks to higher benefits payments.

The data provoked howls of protest from the growing anti-austerity lobby, putting chancellor George Osborne under further pressure to implement a “Plan B” to get the stagnant economy moving.

The opposition Labour party savaged the figures as “a damning indictment of a chancellor who promised to secure the recovery and get the deficit down”, said shadow treasury chief secretary Rachel Reeves.

“His failed plan has delivered the exact opposite – a double-dip recession which is leading to soaring borrowing.”

Accusing the government of “fiscal bungling”, Britain’s biggest union, Unite, urged it to change course before irreversible damage is done to the economy: “This government is hurting but it is not working,” said general secretary Len McCluskey.

There was more gloomy news for the chancellor – and everyone else – as the Confederation of British Industry’s monthly industrial trends survey showed factory orders slumped in August, with figures that were the lowest since last December and, like the deficit data, well below analysts’ expectations.

As the pressure mounts on Osborne, the options he faces are polar opposites – either stick with, and step up, austerity until it starts working, or abandon the Plan A and turn on the infrastructure spending taps.

Both courses are risky, politically and economically, but doing nothing is perhaps the riskiest course of all. With borrowing totalling £44.9 billion for the first four months of the fiscal year, up by £9.3 billion on the previous 12 months, the full year total is on course to climb way beyond the Office for Budget Responsibility’s target of £120 billion. Indeed, some of the more pessimistic economists fear the overshoot could be £30 billion or even £40 billion – figures that are not conducive to the UK retaining its Triple A rating.

The deficit shock and gloomy industrial outlook will overshadow what is expected to be some good news on the UK economy at the end of the week – or at least some slightly less bad news. Friday sees the publication of revised second quarter data for gross domestic product and analysts are expecting a sizeable improvement on the flash estimate of a 0.7 per cent contraction.

Thanks to better data on construction and industrial production published subsequently, the Q2 contraction could be revised to around 0.5 per cent. We’d still be in a double-dip recession, of course, only not one that is quite as deep as initially feared.

That won’t be enough to restore the chancellor’s credibility, which has plumbed new depths in recent weeks.

Last night an ITV News and ComRes poll suggested public trust in Osborne is now at an all-time low, with more than 60 per cent of the population saying they do not trust him to see the country through the current economic situation.

His presentation skills could certainly do with a bit of work – earlier this month, as the Bank of England cut its growth forecasts for the UK to zero, Osborne sounded for all the world like a reality show contestant as he promised the government would “give its 110 per cent attention and effort and energy to getting the economy moving”.

Public trust might be higher if the man in charge of the nation’s money concentrated more on what’s actually achievable, rather than spouting mathematical impossibilities.

FIONA WALSHwrites for the Guardian newspaper in London