London: Britain recorded the largest budget deficit for any October since 2009, dealing a blow to Chancellor of the Exchequer George Osborne less than a week before he issues a key fiscal statement.

Net borrowing excluding public-sector banks was £8.2 billion (Dh45.93 billion, $12.5 billion) compared with €7.1 billion a year earlier, the Office for National Statistics in London said on Friday. Economists in a Bloomberg News survey forecast £6 billion. Government receipts fell 1.8 per cent and spending increased 3.1 per cent.

The figures set the stage for the Autumn Statement and Spending Review that Osborne will announce on Nov. 25. Commitments to increase spending on security in the wake of the Paris attacks and plough billions into infrastructure will come against a backdrop of further cuts to government departments as Osborne seeks to deliver on a vow to return Britain to surplus by 2020.

“In one line: terrible borrowing figures provide grim backdrop to Autumn Statement,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics in London. The data “extinguish any lingering hope that the chancellor will be able to soften his austerity plans materially,” he said.

‘Too high’

The figures leave Osborne on course to overshoot his target of cutting the shortfall to £69.5 billion, or 3.7 per cent of gross domestic product, in the fiscal year that began in April. In the first seven months alone, the deficit came in at £54.3 billion. The Office for Budget Responsibility will publish new forecasts on Wednesday.

In a statement, the Treasury said Friday’s figures show “the job is not yet done and government borrowing remains too high.”

Commitments to protect health, defence, schools and overseas aid mean other departments are facing real-terms cuts in their day-to-day spending of as much as a third over the next four years, extending the austerity that has helped to bring down the deficit from a record 10.2 per cent of GDP — £153 billion — in the aftermath of the financial crisis.

“The chancellor has staked his reputation on achieving a surplus in 2019-2020,” said Philip Shaw, chief economist at London-based Investec Securities. “So absolutely delivering the necessary budget savings is critical.”

Key test

The spending review is also significant politically for Osborne, who suffered a setback last month when unelected lawmakers in the House of Lords rejected his flagship welfare reform — a plan to cut the cost of tax credits that top up the incomes of people on low pay.

Osborne has promised to use his statement next week to soften the impact. A key test will be how well the measures he announces go down with members of his own Conservative Party, many of whom criticised him for penalising the working families the Tories pledged to support in the run-up to the May general election. Osborne remains the favourite with bookmakers to take over from Prime Minister David Cameron before the 2020 election.

“He’s either going to do something to soften the transition or offer help to those who will suffer as a result, as reneging on it is unlikely,” said Tim Bale, professor of politics at Queen Mary University in London. “If he’s got his eye set on moving next door, he should take heed of those voices telling him not to go that strongly on cuts.”

Question mark

While the Lords’ decision leaves a question mark over £4.4 billion of the £12 billion of welfare cuts that Osborne has pledged to deliver, economists expect the chancellor to find money without digging further into departmental budgets, as he has in the past.

One possibility, according to Investec, is that weaker- than-forecast inflation will lead the OBR to cut its estimate of the cost of paying interest on index-linked gilts.

The increase in spending in October was led by government departments, whose outlays rose 4.2 per cent on the year. Revenue was depressed as the Treasury received less in gilt-coupon payments from the Bank of England’s Asset Purchase Facility. Excluding this source of income, government revenue rose 1.4 per cent.

The measure used to calculate how much the Treasury needs to borrow in the financial markets showed a surplus of £65 million, leaving the total deficit so far this fiscal year at £52.3 billion. Net debt was £1.53 trillion, or 80.5 per cent of GDP.