Government borrowing hits 9-year high of £22bn

The British government and its electorate took on record amounts of debt over the summer, according to figures published yesterday.

A surge in public sector borrowing added to speculation of imminent tax rises while a fresh rise in mortgage debt sparked fears of a rise in interest rates.

Vincent Cable, the Liberal Democrat Treasury spokesman said: "These figures demonstrate that the British economy is horribly out of balance."

The Government borrowed £8.6bn in cash last month, the highest deficit for a September on record and taking the cumulative shortfall to a nine-year record of £22.2bn for the first six months of the fiscal year. On the Government's preferred measure, public sector borrowing requirement also hit a nine-year cumulative record of £22.5bn.

With only six months of the financial year gone, the Treasury has racked up more than four fifths of the total £27bn PSNB it forecast in this year's Budget.

City economists said Gordon Brown, the Chancellor, would miss his Budget target and have to revise up his forecasts in December's pre-Budget report.

On average the City expects a £32bn deficit in the current fiscal year and a £34bn shortfall in 2004-2005 when the Treasury is expecting the deficit to shrink to £24bn.

Rising deficits will make it harder for Mr Brown to meet his "golden rule" of balancing the budget over the economic cycle. The ITEM Club, a forecasting model that uses the Treasury, believes the deficit will hit £36bn this year.

Professor Peter Spencer, its chief economic adviser, said: "Unless the Chancellor wants to break his golden rule, he is going to have to scale back public spending or raise taxes in the run up to the next election."

However, most economists said surpluses racked up during the late 1990s would allow Mr Brown to delay any move until the start of the new cycle.

John Butler, UK economist at HSBC, said: "Widening deficits are here to stay. Nevertheless there is likely to be little urgency for the Government to raise taxes ahead of the next election."

But Ruth Kelly, Financial Secretary to the Treasury, said: "You only have to wait a few weeks until the pre-Budget report and a new Government forecast and we will show once again that we've met our rules and the economy's continuing to grow."

Meanwhile the Council of Mortgage Lenders said mortgage lending hit a new quarterly record of £35.2bn over the three months to September. Michael Coogan, its director general, said: "Lending activity shows no signs of slowing in the near future, with the July rate cut having given renewed buoyancy to the mortgage market."

The Royal Institution of Chartered Surveyors said September saw the sharpest rise in new house-hunters for four years, indicating sales and prices will continue to rise.

Mr Coogan added: "Borrowers on variable rates need to plan ahead for higher borrowing costs."