Bank's King says 'pessimistic' about worsening economy

Sir Mervyn King: "I am pessimistic and I am particularly concerned"

Bank of England governor Sir Mervyn King has said he is "pessimistic" about the short-term prospects for the global economy.

He also said he had been struck by how much the situation had changed in the past six weeks.

Sir Mervyn said he was particularly concerned about the worsening situation in Asia and other emerging markets.

His comments followed official data showing the government borrowed more than expected in May.

Excluding financial interventions such as bank bailouts, it borrowed £17.9bn, compared with £15.2bn in May 2011.

A 7% fall in income tax receipts contributed to the rise in borrowing.

'Enormous uncertainty'

Analysis

You know when the Treasury quote "special factors" with government borrowing that the underlying picture is not good.

Spending in May was swelled by tax credits being paid early - usually payments are made in early June but they were brought forward because of the Jubilee Bank Holidays.

But there is no disguising the awkward message of these figures for the chancellor - borrowing over the first two months of this financial year (stripping out the effects of the Royal Mail pension fund transfer to the government) is higher than the same period last year.

What's more it has been revised up for the full 2011-12 year.

Recession is biting into tax revenues and the Treasury will be looking more nervously at the prospects for the rest of the financial year.

Speaking at the Treasury committee, Sir Mervyn said the economic crisis had continued longer than he had expected, questioning the response of European authorities.

"Over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road," he said.

"There is just enormous uncertainty out there, I have no idea what is going to happen in the euro area."

Sir Mervyn confirmed he would be prepared to cut interest rates further if "that turns out to be necessary".

He was one of four members of the Bank of England's Monetary Policy Committee to vote for additional quantitative easing at its last meeting to try to stimulate the UK economy.

One of the main reasons for this was the deteriorating situation in emerging economies, he said.

"And my colleagues in the United States are more concerned than they were at the beginning of the year about what is happening to the American economy," he added.

Target questioned

May's public borrowing figure was higher than many analysts' expectations of about £14.8bn.

The increase in borrowing was driven by a 7.3% fall in income tax receipts and an 11.7% jump in welfare benefits.

Economists said May's figure suggested the government would struggle to meet its target of trimming total borrowing in 2012-2013 to £120bn.

Vicky Redwood, chief UK economist at Capital Economics, said she expected the government to overshoot "significantly".

"The main problem remains a sharp slowdown in tax receipts. And with the economy probably still in recession, receipts are likely to remain weak," she said.

A spokesman for the Treasury said: "It is too early in the financial year to draw conclusions about the year as a whole, especially as today's public finances data include a number of one-off factors and temporary distortions."

Rachel Reeves MP, Labour's shadow chief secretary to the Treasury, said the figures indicated the coalition government's attempt to cut spending had backfired.

"As we consistently warned, if you choke off the recovery and push the economy into recession, the government ends up having to borrow more not less," she said.

Official data released on Thursday is expected to confirm the economy shrank by 0.3% in the first three months of 2012.

Britain's total public sector net debt, excluding financial sector interventions, rose to £1.013 trillion, according to the ONS. This is equivalent to 65% of GDP, a record for the month of May and the third-highest level on record since the series began in 1993.

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