His comments seemed to close down the option of tax cuts as Treasury ministers met to discuss next month's Budget in Dorneywood, the Chancellor's country residence.
John Major told business leaders at a breakfast in Chelmsford, Essex: "Inflation is as much under lock and key as I can ever remember it and inward investment is rising. The only economic blot on the horizon is the size of the fiscal defi-cit. That is a problem."
Labour seized on the admission that the City was right to be worried about public borrowing. Figures this week suggested this year's borrowing figure could be higher than the pounds 27bn forecast by Kenneth Clarke, the Chancellor, only four months ago. That figure was already pounds 4.5bn higher than Mr Clarke's forecast in last November's Budget.
Gordon Brown, the shadow Chancellor, said: "Mr Major's frank admission reveals the true state of public finances which the Tories have been trying to conceal. The fact is that the parlous state of public finances reveals the long-term weakness of the economy."
He repeated his call for an independent audit of government finances before the Budget.
The Prime Minister's unusually frank comments contrast with recent assertions that borrowing is under control. This week's latest borrowing figures were said by the Treasury to have been "distorted".
But they back up Mr Clarke's comments three weeks ago which caused near apoplexy among many Tory MPs. "It is not the case that my Budget requires tax cuts in order to win the election," he told GMTV.
"The public will be deeply suspicious of any tax cuts because they remember we pro-mised tax cuts last time and un- fortunately we weren't able to deliver them."
Part of the explanation for Mr Major and Mr Clarke's comments may have been the annual ritual of lowering expecta- tions in advance of the Budget - and of pre-empting pressure from Conservative backbenchers for dramatic tax cuts.
But it would be difficult for Mr Clarke now to justify tax cuts approaching the top end of City expectations, of between pounds 2bn and pounds 4bn. And it would be almost impossible for him to cut the standard rate of income tax to 20p in the pound - the Tories' long-term objective.Reuse content