Government borrows higher-than-expected £10.6 billion

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The UK's public finances were in worse shape last month as the Government surprised economists by borrowing a higher-than-expected £10.6 billion. 

The Office for National Statistics (ONS) said public sector net borrowing, excluding public sector banks, jumped by 14.5% - or £1.3 billion - in September, compared with the same month in 2015.

Economists were pencilling in a figure of £8.5 billion.

However, Government borrowing excluding banks in the financial year to date - April to September - fell by £2.3 billion to £45.5 billion in contrast with the same period last year.

The ONS said public sector net debt excluding banks climbed by £39.5 billion to £1,627.2 billion last month, the equivalent to 83.3% of gross domestic product (GDP).

Chancellor Philip Hammond previously indicated that the Government could take advantage of the cheap cost of borrowing to push fresh investment into the UK in the hope of bolstering productivity.

The move would be a departure from the economic direction plotted by former chancellor George Osborne, whose aim of achieving a budget surplus by 2020 was scrapped by Prime Minister Theresa May.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said progress the Government had made in driving down the budget deficit had "virtually halted". 

"With the budget deficit set to equal about 3.5% of GDP this year and likely to rise next year as the economy slows, and the sharp rise in gilt yields underlining that investors' confidence is fraying, we expect the Chancellor to be cautious," he added.

The ONS said September's borrowing rise was driven by an increase in net borrowing from central and local government, which stepped up by £1.3 billion and £300 million respectively.

It came despite central Government tax receipts rising 2.6% - or £1.2 billion - to £49 billion last month, compared with September 2015.

National Insurance contributions rose by 8% - or £700 million - to £9.8 billion over the period, while VAT receipts lifted by 1.4% - or £200 million - to £11.1 billion. 

It helped to offset an 8.7% - £200 million - drop in corporation tax receipts to £2.3 billion. 

Central Government spending jumped 4.3% - or £2.4 billion - to £57.2 billion last month, compared to September 2015.

John Hawksworth, chief economist at PwC, said: "Today's public borrowing figures were a bit of a cold shower for the Chancellor after the recent run of generally favourable post-referendum economic data."

He said it was looking increasingly difficult for Mr Hammond to meet the Office for Budget Responsibility's (OBR) forecast from March, which suggested total public sector borrowing would hit £55.5 billion for 2016/17. 

It would mean borrowing for the second half of the year would have to come in at just £10 billion.

"A more likely outcome based on the available data is that the budget deficit this year will come in at around £65 to £70 billion," he added.

"We would not, however, expect the Chancellor to take any immediate action in the Autumn Statement to correct this budget deficit overshoot, as this could be counter-productive and further weaken the economy."