Brown kisses goodbye to Prudence

Chancellor signals £20bn rise in debt; global upturn in sight, says Treasury; King is new chief at Bank of England

Gordon Brown announced a near-doubling of government borrowing yesterday to avoid further tax rises or cuts in public services during the global economic slowdown.

In his pre-Budget report, the Chancellor disclosed that the Government would need to borrow £20bn more over the next two years than he predicted just seven months ago in the Budget.

Despite scaling down his forecast for growth this year from between 2 and 2.5 per cent to just 1.6 per cent, Mr Brown issued an upbeat assessment of Britain's ability to survive the global problems.

The Chancellor, who predicted growth would rise to between 2.5 and 3 per cent next year, is gambling on what analysts called a "rosy scenario" of a manufacturing recovery and a consumer-spending slowdown to prevent Britain's "two-speed economy" blowing his entire strategy off course.

Mr Brown announced borrowing in the current 2002-03 financial year would rise from the £11.2bn predicted in April to £20.1bn, some £5bn more than the City expected. For 2003-04, he raised his borrowing estimate from £13bn to £24bn. In the next five years, the Government will borrow a total of £101.1bn instead of the £72.2bn forecast in the Budget.

Brown aides dismissed the figures as "peanuts" when compared to an equivalent deficit of £80bn under the Tory administration in the early 1990s. They insisted there would be no need for tax rises on top of the 1p increase in national insurance contributions already announced for April.

The Chancellor unexpectedly raised public spending by setting aside £1bn for the fight against terrorism and a war in Iraq. With his room for populist measures strictly limited, he promised to champion the setting up of new $50bn (£33bn) international aid fund to help the poorest countries – although the United States was sceptical of his previous efforts in this area.

Mr Brown sought to protect his reputation by insisting his draft Budget would safeguard Britain's hard-won economic stability. In a message aimed at striking firemen, he said stability could not be put at risk by "inflationary and unaffordable pay settlements" in the public and private sector.

The Chancellor had rejected the alternative approach of cutting spending and borrowing. "It would lead directly to depressed demand, rising unemployment and the old boom-and-bust approach," he said.

Michael Howard, the shadow Chancellor, said Mr Brown had been "humiliated" into changing his forecasts for revenue, borrowing and growth. "These are the downgraded forecasts of a downgraded Chancellor," he said.

Economists in the City said Mr Brown had taken a large gamble by betting on an economic recovery in time to prevent raising taxes in the run-up to a general election.

John Butler, UK economist at HSBC, said: "The Chancellor is prudent during the upturn, locking in the surplus and assuming it will last for ever. But when it comes to a downturn, he is a gambler. He is gambling on an economic rebound in 2004. There are a lot of reasons why we don't expect that to happen."

The City leapt on Mr Brown's decision to name Mervyn King as the successor to Sir Edward George, who retires as governor of the Bank of England in June. Analysts said that, as a known Eurosceptic, Mr King's appointment had closed the door on an early euro referendum. His rivals, Sir Howard Davies, the Financial Services Authority chairman, and Andrew Crockett, a former central banker, were seen as more in favour.

The analysts' view was reinforced by Mr Brown's Commons statement in which he linked the UK and the US as the most successful economies, contrasting them with the dire state of France and Germany. Mark Cliffe, an ING Barings economist, said: "It fits with the idea the Treasury has decided the five economics tests have not been passed."

Mr King is known as an inflation "hawk" and the money markets moved swiftly yesterday to forecast a hike in interest rates next year.