Brown 'may have to raise taxes to balance budget'

The public finances plunged further into the red last month, fuelling fears that the Government will have to raise taxes again to keep its public spending plans on track.

The public finances plunged further into the red last month, fuelling fears that the Government will have to raise taxes again to keep its public spending plans on track.

The Treasury posted a higher-than-expected deficit as tax revenues fell but Whitehall spending continued to accelerate.

Public sector net borrowing was £5.2bn, much higher than City economists had forecast and the largest shortfall for a September since records began in 1993.

The deficit took the cumulative total for the first six months of the financial year to £12.4bn, almost £10bn higher than a year ago when it was just £2.5bn.

The total is also already in excess of the £11bn that Gordon Brown forecast for the year to April in this year's Budget.

Jonathan Loynes, chief UK economist at Capital Economics, who expects a £5bn overshoot said: "This will no doubt fuel speculation that taxes will have to rise significantly in next year's Budget and perhaps even in next month's pre-Budget report."

But he urged the Chancellor to let the UK slip into deficit rather than raise taxes. "With the economy still heavily dependent on consumers, higher taxes are the last thing needed," he said.

Michael Saunders, at Citigroup, said he expected the Treasury to miss its target by £9bn. "The scale of the deterioration makes it virtually inevitable the Chancellor will revise up the deficit forecast in the pre-Budget report."

A Treasury spokesman said it was far too early to draw conclusions from one's numbers. "The main months for tax receipts, October and January, are yet to come," he said.

Its figures showed income receipts are down 0.2 per cent this year while corporation tax revenue is down 3.9 per cent. Overall revenues are up 1.5 per cent against government forecasts of 4.3 per cent for the year.

Meanwhile central government spending has risen by almost 12 per cent, compared with forecasts of 8.4 per cent in the Budget, according to the Institute for Fiscal Studies.

Christine Frayne, an IFS research economist, said: "Whether this will necessitate higher taxes or lower spending in the future will depend on whether this deterioration persists for the rest of the year."

Meanwhile the US trade gap jumped nearly 10 per cent in August to a record $38.46bn (£24.78bn), as exports fell for the first time in six months and imports rose at their highest level since March 2001.

The sharp increase in the deficit renewed concerns it could eventually lead to a sharp drop in the dollar. However although there was little market reaction as traders focused on stock prices, which trod water after the gains of the past week.