Public sector net borrowing exceeded expectations in August but this was roughly balanced by downward revisions to earlier months in 2010-11, reflecting lower central government current expenditure and a higher yield from the bank payroll tax (now estimated at £3.5 billion versus £2.5 billion in the June Budget). Borrowing remains on course to undershoot the OBR's full-year forecast of £149 billion by a significant margin.

Attempting to adjust for seasonal factors, borrowing excluding the temporary impact of financial interventions averaged £11.65 billion in the first five months of the fiscal year, or £140 billion annualised – see chart. The OBR forecast, therefore, implies renewed deterioration over the remainder of 2010-11.

This is unlikely because the benefits of economic recovery should grow as the year progresses while much of the £8.1 billion of spending cuts and tax rises announced since the election has yet to take effect. Even assuming no further decline in the underlying run rate, these measures should lower full-year borrowing to £136 billion or less.

The evolving undershoot increases doubts about the wisdom of the coming VAT hike (projected to raise £12.1 billion 2011-12), especially with consumers facing a large rise in food bills this winter – food commodity prices have continued to climb recently, with the CRB spot foodstuffs index in sterling terms now 11% above its August average.