Chancellor Rachel Reeve has been handed a £3bn blow to VAT receipts as the fiscal watchdog warned that cash-strapped consumers could be switching to cheaper food options amid soaring inflation.
The Chancellor was forced to borrow £11.4bn more than the Office for Budget Responsibility (OBR) had forecast between April and August, official figures showed. The OBR said this could be blamed on local councils borrowing £2.8bn more than expected during the period, as well as lower-than-expected receipts for the Treasury.
It said cash VAT receipts were £3bn below forecast in the first five months of the financial year. Receipts in August stood at £12.8bn, which was £3.2bn below the OBR’s expectations and £1.4bn weaker than last year.
The budget watchdog said the shortfall “could reflect the composition of spending if higher-than-expected food prices has led to more spending on zero-VAT rated items”. A zero VAT rate is applied by HMRC on basic foods like fruits, vegetables and bread.
Food inflation has surged in Britain over the last five months, hitting 5.1pc in August, with economists predicting it could near 6pc before the end of the year as employers pass on rising costs from the Chancellor’s tax raid.
It comes as the Office for National Statistics (ONS) said public sector net borrowing hit £83.8bn during the first five months of the financial year, having jumped by another £18bn in August. It was the highest August figure for five years and £5.5bn higher than forecast by the Chancellor’s tax and spending watchdog, with the Treasury forking out £8.4bn in debt interest payments alone during the month.
It leaves borrowing so far this financial year £11.4bn above the £72.4bn that had been projected by the Office for Budget Responsibility (OBR) in March.
The rise in borrowing comes as economists believe the Chancellor will have to raise taxes by at least £20bn during her Budget on Nov 26, a little over a year after she put up levies on the nation by £40bn.
The Government has spent £36.8bn more so far this financial year than in the same five-month period a year ago, with rising public spending and debt costs outstripping the receipts from Ms Reeve’s tax raid.
Interest payable on central government debt has increased by £10.6bn to £49.9bn since April as a result of fluctuations in inflation-linked bonds. Meanwhile, departmental spending on goods and services was up £16.2bn to £189.8bn as pay rises and inflation increased running costs.
ONS chief economist Grant Fitzner said: “Although overall tax and National Insurance receipts were notably up on last year, these increases were outstripped by higher spending on public services, benefits and debt interest.”
