Public borrowing hits record

The government suffered a record budget deficit last month, official figures showed yesterday, but the government insisted that the public finances had not run out of control.

The Office for National Statistics reported public sector net borrowing of £8.7bn in May, considerably more than the City had expected and the worst since monthly records began in 1993. It was also worse than the £7bn shortfall in May last year.

The Tories leapt on the data: "These figures make grim reading, and vividly illustrate the poor state of the public finances. Gordon Brown borrowed more money last month than at any time during his eight years in office. His claims to be a prudent chancellor are becoming a distant memory," said shadow chancellor George Osborne.

But the Treasury said the bad May figure was due to an unusually strong pick-up in spending last month but, taken together with April's unusually low spending figure, the public finances remained on track.

"We have only completed two months of the current financial year, but over those two months as a whole we have seen a further strengthening of the public finances," said a spokesman.

"Central government spending in May was higher than last year, in large part because of a boost in education. But with spending growth over the first two months controlled at just 4.9% - lower than forecast in the budget - we continue to meet our fiscal rules."

Mr Brown came under fire during last month's election campaign for running bigger deficits than expected which would require him, critics said, to raise taxes after the election to meet his "golden rule" of covering current spending from tax revenues over the ups and downs of an economic cycle, borrowing only to invest.

An important reason for last month's bad overall deficit was a jump in net investment spending to £2.7bn, nearly double that of the same two months of 2004-05.

Once the net investment is subtracted, the current budget in fact showed a small improvement in the first two months of the year, recording a deficit of £7.5bn compared with £8.4bn last year.

John Hawksworth, an economist at PricewaterhouseCoopers, said he was less confident than the Treasury that corporation tax and VAT receipts would grow as strongly as Mr Brown forecast in his March budget, meaning the current budget deficit for the year would be larger than the chancellor had forecast.

"Overall, it remains too close to call whether the chancellor will meet his golden rule in the current cycle, but the latest monthly data will not cause him to sleep any more soundly," he said.

Separately, there was mixed data on mortgage lending. The British Bankers' Association reported that underlying mortgage lending picked up to £4.3bn in May from £4bn the month before but remained below the recent average of £4.5bn a month. But the Building Societies Association said new mortgage approvals fell for the first time since last November and to £1.1bn, the lowest level since January.

"The mortgage lending data for May are pretty subdued overall, providing further evidence that housing market activity has been unable to build on the modest seasonal improvement seen earlier this year," said Howard Archer, an economist at Global Insight.

Earlier yesterday, the website Rightmove reported that asking-price inflation for houses had fallen to 2.4%, below rises in average earnings for the first time this decade.