Gordon Brown was accused of "moving the goalposts" yesterday as he prepared to relax his fiscal rules to prevent them being breached.
The Tories claim Mr Brown's reputation for economic prudence would be in tatters if, as expected, the Government waters down the "sustainable investment rule" that limits public sector debt to 40 per cent of national income.
Treasury officials are believed to be drawing up a looser framework to allow borrowing to rise further so the Government can avoid spending cuts or tax rises as its revenues fall in the economic slowdown. An announcement is likely by the Alistair Darling, the Chancellor, in his pre-Budget report in the autumn.
The pledge to limit debt was one of the two rules Mr Brown set down after Labour came to power in 1997 in attempt to cement his economic credentials. The other, his "golden rule" says that current spending must be covered by revenue over the economic cycle. The move emerged on the day official figures revealed that public sector borrowing had risen by more than expected, suggesting the economic slowdown is hitting government coffers.
Public sector net borrowing (PSNB) was £9.16bn, a record amount for June and more than analysts' forecasts of £7.4bn. Borrowing so far this financial year has reached £24.4bn since April – the biggest quarterly figure since 1946.
Mr Darling appeared to hint at a rethink by pointing out that Government borrowing levels in Britain were currently lower than in most other major economies, including France, Germany, Italy and the US.
Speaking yesterday he said: "The key position is this: of course it is right - especially now when our economy along with every other economy in the world is being hit by two shocks; the credit crunch and very high oil prices - that we allow borrowing to support the economy. But what is critical is that you do have rules to ensure the public finances are sustainable in the medium term.
"That is why rules are so important now and why they will remain important in the future."
Mr Osborne said: "The Brown era of economics is over.
"He staked his credibility on the fiscal rules. They were part of the arrangement he announced a decade ago to constrain government and make sure that money was put aside in the good years to prepare for the bad years.
"Now we've reached those bad years, the public finances are in a mess, and the rules are being ditched. It's like giving the prisoner the keys to their own prison cell."
Liberal Democrat Treasury spokesman Vince Cable said the rules should be be put in the hands of an independent body to stop the Government "fiddling" the figures.
"The fiscal rules have no credibility when the Government keeps fiddling or changing them," he said.
"It's completely lacking credibility for the Treasury to be marking its own exam papers and setting its own questions. What we need is an Ofsted for the economy."
Maurice Fitzpatrick, at the accountants Grant Thornton, said public debt, due to be 38.5 per cent of GDP in the current financial year, is on course to rise to 42.3 per cent by 2011. "The sustainable investment rule would have been decisively breached," he said. Tax rises equivalent to adding 2p or 3p on the basic rate of income tax would have been needed to avoid breaking the rule, either side of a 2010 general election.
Robert Chote, director of the Institute for Fiscal Studies, said the Government should have rethought the rules "before the point at which it looks as though you are just about to break them".
Yesterday, figures from National Statistics showed that public sector borrowing reached a higher-than-expected £9.2 bn in June. Net debt stood at 38.3 per cent of GDP, up one percentage point on a year ago.
Gordon's 'golden rule' may be broken
* The "golden rule" states that over the course of the economic cycle, the Government can borrow only to invest, so that current spending such as running costs and employees' wages is covered by revenue. Critics say the rule is discredited because the economic cycle has been constantly refined.
*The "sustainable investment rule" says public sector net debt should be no more than 40 per cent of gross domestic product. The proposed change would initially allow borrowing to rise during the economic downturn but the medium-term budgetary position could be tighter than planned.Reuse content