Gap between state spending and revenue is worst in October for six years with economists warning chancellor will need further austerity or miss annual target

George Osborne’s deficit-cutting drive has been dealt a blow ahead of next week’s spending review after official figures showed the worst October for the public finances in six years.

The deficit, or the gap between what the government spends and takes in, swelled by 16% from a year earlier to £8.2bn in October, according to the Office for National Statistics (ONS). It was a larger shortfall than the £6bn forecast by economists in a Reuters poll.

The chancellor wants to eliminate the deficit on the public finances by the end of the decade. As part of that push, he will unveil plans in his spending review on 25 November to cut government department spending by around £20bn over the next four years.

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Economists said the latest public finances suggest Osborne will miss his deficit-cutting goals for this year and that he will redouble austerity measures in next week’s spending review and accompanying budget update, known as the autumn statement.



“October’s poor borrowing numbers extinguish any lingering hope that the chancellor will be able to soften his austerity plans materially in next week’s autumn statement,” said Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics.



The Office for Budget Responsibility has forecast a deficit of £69.5bn in the fiscal year to April 2016. In order for the chancellor to meet that target, borrowing in the second half of the fiscal year would have to fall an “implausible” 48% on the same period a year ago, said Tombs. The ONS figures showed that in the financial year so far, public sector net borrowing was already £54.3bn.

The OBR publishes new forecasts at the time of the autumn statement next week and is widely expected to raise its forecast for the deficit for this full financial year.

The deficit for the financial year starting in April until October was smaller than a year earlier but not down by as much as the government would have liked at this stage, economists said. The decrease of £6.6bn, or 10.9% compared with the same period a year earlier, was mainly driven by a drop in central government net borrowing but partially offset by an increase in local government net borrowing, the ONS said.

“The big picture here is that the government deficit is closing ... But that decline in borrowing is not as rapid as the OBR predicted at the time of the budget in July,” said Chris Hare, economist at banking group Investec.

Reacting to the last public finances update before the spending review, a Treasury spokeswoman said rising employment and wages showed the government’s economic plan “is working”.

“But as today’s public sector finance figures show the job is not yet done and government borrowing remains too high,” she added.

“We’ve learned there’s no shortcut to fixing the public finances to provide economic security for working people – that’s why in the spending review next week we’ll continue the hard work of identifying savings and making reforms necessary to build a resilient economy.”

The prolonged squeeze on wage growth since the recession has repeatedly led to disappointing tax receipts. But with the latest official figures showing pay increasing at an annual rate of 3%, income-related taxes are recovering.



However, economists warn that a recent slowdown in economic growth could bode ill for future government income.

Howard Archer, economist at the consultancy IHS Global Insight, described the latest figures as “very disappointing and difficult news for Chancellor George Osborne to digest”.

“Furthermore, with the economy seeing GDP growth slow in the third quarter, there is the risk that tax receipts could undershoot going forward. The chancellor will obviously be hoping that the economy can kick on and is not hampered by global growth being held back by a marked slowdown in China and emerging markets,” said Archer.

“He will also be hoping that the economy is not handicapped significantly by heightened uncertainty in the run-up to the referendum on UK membership of the European Union.”

Net debt

Public sector net debt excluding public sector banks. Illustration: ONS

With the government still running deficits each month, the UK’s total debt pile is still increasing, according to the ONS. In total, the UK now owes more than £1.5tn, equivalent to 80.5% of GDP. That compares with 69% in 2010/11, Osborne’s first year as chancellor under the Conservative-Liberal Democrat coalition government.