'We'll spend our way out of recession'

Gordon Brown insisted tonight the Government would still go ahead with plans to spend its way out of the looming recession, despite a massive rise in public sector debt.

Official figures showed net borrowing hitting a record £37.6 billion between April and September - higher than the whole of the previous year.

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The sharp increase left Chancellor Alistair Darling's forecasts of £43 billion of borrowing this year in tatters and led to warnings that debt could balloon to £120 billion in three years.

In the Commons, Tory leader David Cameron warned the country was entering the global economic downturn with "the highest government deficit in the industrialised world".

In exchanges with Mr Brown, he pointed to one economic forecast predicting that total debt this year could hit £64 billion.

"Isn't the £64 billion question this: why, when business and families need more help, has he left the cupboard so bare?" he demanded.

The Prime Minister however insisted the public finances were in good shape and the Government could afford to borrow to finance a major programme of public works - outlined by Mr Darling at the weekend - in a bid to stave off the worst effects of the downturn.

"It is because we cut the national debt over the last few years that we are able to do what is the right thing," he told the House.

He cited figures from the International Monetary Fund which put debt in Britain at 37.6 per cent of national income, compared to 55.5 per cent in France, 56.1 per cent in Germany, 101.3 per cent in Italy, 46.3 per cent in the United States, and 94.3 per cent in Japan.

However more recent figures for September, which include the liabilities of the nationalised Northern Rock, show that debt in the UK has since risen to 43.4 per cent.

Earlier the Department for Business, Enterprise and Regulatory Reform confirmed it was considering delaying the introduction of new flexible working rights in order to ease the pressure on businesses.

"We are looking at the appropriateness of new regulations that are due to come into force - that includes employment regulations," a spokesman said.

The Tories meanwhile unveiled their own proposal to cut the rate of employers' National Insurance contributions by 1p for at least six months for firms with fewer than five employees.

The UK's finances have been hit as tax revenues fall and benefit spending rises as the economy hurtles towards recession. Tax handouts to tackle the 10p tax row and kick-start the housing market have added to the burden.

With an election due in 2010 an incoming Government will be faced with the unpalatable choices of cutting spending, raising taxes - or both - to put the finances on a firmer footing.

Mr Darling said in March's Budget that public sector net borrowing would reach £43 billion in the current financial year, before falling to £38 billion next year.

But these figures will be hiked upwards in his pre-Budget statement due before Christmas.

Global Insight's chief European and UK economist Howard Archer said the sharp increase in borrowing means the Chancellor's room for manoeuvre has been "severely limited".

"It will make it all the more important that he maps out a way that the public finances can be reined in to a sustainable state over the medium term once the economy is on a sounder footing," he said.