Chancellor borrows more as North Sea revenue falls

Chancellor borrows more as North Sea revenue falls

An unexpected and sharp drop in tax revenue from North Sea oil companies and a rise in inflation have resulted in the chancellor having to raise taxes and borrow more money, the Treasury said yesterday.

In spite of boasting of a stronger economy in yesterday's pre-budget report, which normally would boost tax revenues, Mr Brown has suffered an unexpected drop in revenues of £3bn in 2007-08 and £2bn in 2008-09 from the North Sea.

This was due to a bigger than expected drop in oil production, a fall in the value of the dollar in which oil is priced, and a rise in investment by North Sea operators, which reduces their taxable profits.

On the spending side, the Treasury was taken by surprise by the surge in inflation in the second half of this year. September's retail price index reading came in at a hefty 3.7%. The Treasury's problem is that increases in state pensions and a host of social security benefits as well as index-linked government bonds are all linked to the September figure. Officials said this would cost an additional £1.5bn next year.

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So Mr Brown was forced to raise taxes in the coming three years by £2bn a year. The biggest single item was the doubling of air passenger duty which will raise £1bn a year. The rest will mostly come from tackling tax evasion, but council tax is also set to rise by an average of 5.8% next year.

The rise in petrol duty in line with inflation does not raise revenue for the chancellor because the Treasury assumes each year that this will be the case.

Mr Brown also, as expected, raised his estimate of the economy's "trend" rate of growth in the coming years, as increased immigration and a rise in the number of old people working has increased the economy's potential growth. This allows him to raise his forecast for tax revenues over the coming years. Peter Spencer, of the Ernst & Young ITEM club, says it nets the Treasury £7bn over the next four years.

But in spite of that, the public finances are still not improving as the chancellor had forecast in the budget. The surplus on the current budget, which excludes investment, is projected to be £7bn worse than in the budget over the next three years while net borrowing will be £6bn worse. The public finances will still be £23bn in the red in 2010-11, a decade of deficits.

Mr Spencer thinks the public finances will not even improve in line with the Treasury's forecasts because the Treasury is too optimistic about growth and revenue and will struggle to reduce spending growth as it has planned.

This, he adds, is why the pre-budget report declares that the economic cycle will end this financial year with Mr Brown just meeting his "golden rule" of balancing spending with tax revenues over the cycle.

"When Mr Brown leaves the Treasury, there will be a new cycle for a new chancellor. But the new chancellor will not inherit a decent set of public finances," he says.

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