Government pays down £11.4bn of debt as raids money printing fund

The Government could be forced to pay a compensation bill as big as the entire defence budget if a legal challenge launched today over the rejigging of the retail prices index succeeds.

Official figures showed that the Government paid down £5bn more debt last month than in January 2012, largely as a result of seizing the £3.8bn of excess cash in QE. An increase VAT and income tax receipts offset a £1.2bn fall in corporation tax income for the month.

The surplus was the second largest for the month since records began in 1993 and, even excluding the QE cash, was better than last year – at £7.6bn. It was also marginally better than economists had expected, reports The Telegraph.

However, the receipts were not expected to spare the Chancellor his blushes at next month’s Budget, when the Office of Budget Responsibility (OBR) is expected to say that borrowing in 2012/2013 will rise despite a £28bn austerity round – excluding one-off impacts.

Martin Beck, UK economist at Capital Economics, said: “Underlying borrowing is still likely to come in £3bn-£5bn above the OBR’s forecast of £119.9bn.”

Were nothing else to change, the Chancellor would already have to admit to a rise in borrowing this year. The Office for National Statistics has now estimated that borrowing for 2011/2012 was £121bn. The OBR’s forecast of £119.9bn for 2012/2013 assumed £3.5bn of income from the 4G spectrum sale.

However, the auction raised £1.2bn less than hoped, automatically putting the official borrowing forecasts at around £100m above last year.

The Chancellor has been able to reduce headline borrowing through a series of one-off items – the £3.8bn QE cash, which will rise to £6.4bn for the full year; a £28bn gain from taking over the Royal Mail pension scheme; and a £2.3bn dividend from the closure of the special liquidity scheme for Britain’s stricken banks.

For the financial year from April 2012 to January, borrowing was £65.8bn – £26.5bn less than in the same period of the previous year. However, once the one-off items are stripped out borrowing has actually risen by £7.5bn to £99.9bn.

Government spending in January was £2.1bn higher than last year, despite a £900m reduction in debt interest due to the UK’s record low gilt yields. For the from April to January, spending was £13.9bn higher than in the same period last year. Tax receipts have risen by just £2.3bn, excluding the special items.

Public debt hit £1.16 trillion, or 73.8pc of GDP, after the nationalised lenders – Northern Rock and Bradford & Bingley – were taken on to the Government’s books, adding £71bn to the official figures.

Chris Leslie, shadow financial secretary to the Treasury, said: “A flatlining economy means the government is borrowing more to pay for economic failure as the welfare bill is up. By failing on growth and jobs, David Cameron and George Osborne are failing on the one test they set themselves – to get the deficit and debt down.”

A Treasury spokesman said: “[The figures] underline what the Governor of the Bank of England said last week: the road ahead will be difficult, but the economy is on the right track. The deficit has been cut by a quarter in two years and over a million private sector jobs have been created.”