Public finances hit record £10.8bn deficit

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The Independent Online

A surge in Whitehall spending plunged Britain's public finances into a record deficit last month, triggering fears that Gordon Brown will have to raise taxes to fill a black hole in the Government's coffers.

The Treasury borrowed £10.8bn in September, the largest cash requirement for any September since records began in 1984, the Office for National Statistics said. The Government's preferred measure, public sector net borrowing, doubled to £4.8bn taking the shortfall so far this financial year to £22.8bn.

This means the Treasury has borrowed more than two-thirds of the £33bn that it forecast for 2004/05 after just six months of the fiscal year.

Carl Emmerson, the senior research economist at the Institute for Fiscal Studies, said: "September's figures are unlikely to make pleasant reading for the Chancellor." The IFS said the Chancellor was on track to break his self-imposed "golden rule" of balancing the budget over the 1999 to 2006 economic cycle. He said the Treasury might be tempted to rule that the end of the economic cycle - when the economy is running at full capacity - took place this year. Mr Emmerson said: "This would put him on course to meet the rule in the short term but would increase the need for tax rises or spending cuts to ensure that the rule is met over the cycle."

The ONS figures showed government spending jumped by 11 per cent last month, taking the increase so far this year to 6.7 per cent, outstripping the Budget target of 5.2 per cent.

Whitehall sources said the increase was explained by extra spending by the Ministry of Defence, linked to Iraq, and by the Department for Education at the start of the school year.

Meanwhile tax revenues for the first half of the financial year posted 6.8 per cent annual growth - the highest figure so far this year but still well adrift of the 7.8 per cent forecast.

Professor Peter Spencer, economic adviser to the Ernst & Young ITEM Club economic model, said the weakness in revenues was "disappointing in view of the strength of the economy and oil prices". He said the Treasury's models indicated that the surge of $10 in the price of a barrel of oil since the Budget should have boosted revenues by £1.4bn.

A Treasury spokesman said: "We remain firmly on track to meet our strict fiscal rules."