* UK borrows 8.6 bln stg in Oct, up from 5.9 bln last year
* Figures pressure finance ministry before Dec budget update
* BoE rules out rate cut, against other stimulus for now
* Weak economy, falling corporation tax, behind shortfall
By David Milliken and Olesya Dmitracova
LONDON, Nov 21 Britain borrowed much more than
expected in October, thwarting finance minister George Osborne
in his efforts to reduce the deficit and shunt the economy away
The figures published on Wednesday show weaker businesses -
mostly in the oil and gas sector - paying less tax than expected
and may undermine government efforts to shore up public support
for its policies of spending cuts and tax rises.
The numbers are the last figures to be released before
Osborne presents his twice-yearly fiscal update on Dec. 5. After
a positive surprise in September, they revert to the borrowing
overshoots seen for most of the tax year.
Separately, minutes of the latest Bank of England meeting
showed little appetite for more stimulus, cutting off for now
that alternative avenue of support, at a time when BoE Governor
Mervyn King anticipates weak growth and rising inflation.
The Office for National Statistics said the government's
preferred measure, public sector net borrowing excluding
financial sector intervention, came in at 8.6 billion pounds
($13.7 billion) in October, up from 5.9 billion pounds in
This was well above economists' average forecast of 6
billion pounds, and higher even than the most pessimistic
estimate in a Reuters poll of 19 analysts.
A large part of the increased deficit is due to a 10 percent
drop in corporation tax receipts, driven by lower profits from
energy companies after a 20 percent annual fall in oil and gas
extraction in the 12 months to September due to extra
maintenance and long-term decline in North Sea reserves.
"The Chancellor faces some big fiscal challenges, because
what's happening is that stalling growth is pushing up the
deficit. The data tells the picture of a stagnant economy," said
Rob Wood, UK economist at Berenberg Bank.
Britain's government has made reducing a budget deficit that
peaked at more than 11 percent of national income its top
political priority since it came to power in May 2010, but slow
economic growth means this goal keeps receding.
The central bank seems unlikely to offer any further
economic boost in the short term either. Its policymakers voted
8-1 against more asset purchases this month and ruled out an
interest rate cut.
Britain emerged from its second recession since the 2008
financial crisis in the third quarter of this year, but the BoE
and most economists say underlying growth is weak and unlikely
to pick up strongly over the coming year.
Households are suffering from inflation eating into their
disposable income. At 2.7 percent, it remains above the BoE's 2
percent target, though below September 2011's 5.2 percent peak.
BoE policymakers say they are reluctant to approve more
asset purchases to boost the economy, in part because they are
concerned that weak productivity means further stimulus is
likely to translate into inflation rather than growth.
News from the corporate sector has been mixed. British
bicycles-to-car-parts group Halfords posted a 23 percent
slump in first half profit earlier on Wednesday, though clothing
retailer Arcadia reported a 25 percent rise in underlying
profit, albeit on flat full-year sales.
The government will be eyeing any upturn in corporate
profits closely. For Osborne to meet his 2012/13 borrowing
goals, public sector net borrowing needs to fall 1.2 percent to
120 billion pounds, but so far it is 7.4 percent higher than at
the same point in 2011, the statistics office said.
In cash terms, borrowing so far this year is 5.0 billion
pounds up on a year earlier at more than 73 billion pounds,
compared with the 2.6 billion pound overshoot estimated by the
ONS last month.
However, Britain's finance ministry said public spending was
under control, even if some tax receipts were weaker than hoped.
"The economy is healing, but it still faces many challenges.
These numbers illustrate that, but also show the government's
plans to bring spending under control are on track for the
year," a finance ministry spokesman said.
When it came to power in 2010, the government had
originally planned to eliminate the structural budget deficit by
2015 with spending cuts and tax rises.
But a weak economy has forced it to extend austerity by
another two years and Prime Minister David Cameron has warned it
could take even longer - until 2020.
After the borrowing figures, the opposition Labour Party
repeated its view that the pace of deficit reduction was
"By squeezing families and businesses too hard, choking off
the recovery and so pushing borrowing up not down, the
government's economic plan has completely backfired," Labour
Party finance spokeswoman Rachel Reeves said.