Government borrowing fell drastically last month, figures have revealed, but economists still fear it will miss deficit reduction targets for the year.
Public sector net borrowing, excluding financial interventions such as bank bailouts, dropped to £20 million, compared to £3.5 billion in the same month a year ago, said the Office for National Statistics (ONS). This was substantially lower than the £2.5 billion expected by the City after a rise in tax returns and a fall in local government spending.
But even though the figures were better than expected, economists still fear the Government will miss the target set by its watchdog, the Office for Budget Responsibility (OBR), as the UK's sluggish economic growth hits tax returns.
The OBR expects borrowing to fall to £122 billion in the current financial year, compared with £142.7 billion the previous year. The Government has now borrowed £40.1 billion so far this financial year, down on the £43.1 billion in the same period the previous year.
Samuel Tombs, UK economist at Capital Economics, noted that borrowing figures for earlier this year were revised higher and said July's improvement was not enough to hit the forecasts of the OBR.
He added: "Borrowing for previous months was revised up, so on current trends it will overshoot the OBR's full-year forecast of £122 billion by around £10 billion. This overshoot largely reflects the weakness of tax receipts."
Shadow Treasury minister Kerry McCarthy said that four months into the financial year, "the risk remains that George Osborne will miss his deficit targets for the year".
She added: "The Chancellor is risking a vicious circle where slower growth means fewer people in work paying taxes and more people on the dole claiming benefits - making it harder to get the deficit down."
The OBR said the current borrowing reduction was a smaller proportionate decline so far than it had forecast in March but said tax receipts should grow in the remainder of the year as more people start paying the 50p rate of tax. It will revisit its forecasts in the autumn and many expect them to be revised downwards amid weaker economic growth.
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A Treasury spokesman said the figures continue to show "deficit reduction taking effect with the public finances in balance in July". He added: "However, as recent weeks' events have shown, with the US ratings downgrade and continued turbulence in Europe, it is vital that the Government sticks to this plan."
