Record borrowing threatens Brown's rules

The Treasury risks breaking both its cherished fiscal rules, analysts said yesterday, after borrowing surged to a record in June and Government statisticians unveiled plans to bring Private Finance Initiative schemes on to the books.

The Government borrowed more last month than in any June since comparable records began, official figures showed. Public sector net borrowing jumped to £7.3bn from £6.2bn a year earlier.

The budget on current spending, which is used to test the golden rule, hit a record June deficit of £6.4bn, close to the £7bn Gordon Brown forecast for the entire fiscal year in his March Budget.

John Hawksworth, the head of economics at the accountants PricewaterhouseCoopers, said spending had risen 10.4 per cent in the second quarter, well above Budget forecasts of 5.9 per cent, while tax receipts were running below forecasts.

"This is not a good start to the financial year and makes it challenging for the Chancellor to achieve his forecast," he said.

The golden rule states the Treasury must borrow only to invest and that current day-to-day spending must be paid for out of tax revenues, when averaged over an economic cycle.

The second, sustainable investment, rule says the stock of debt must not exceed 40 per cent. Yesterday's figures showed it rose to a six-year high of 37.6 per cent.

This was boosted by a 43 per cent increase in net investment, which does not count against the golden rule, to £5.4bn in the latest quarter from £3.8bn a year earlier.

In September, the Office for National Statistics will publish the results of its review of the implications of PFI schemes and public-private partnerships for the Treasury's finances. While the Government has signed deals worth £46bn, the ONS indicated the implications for the public finances would be much smaller.

It has established £23bn will at some point have to appear on the Government's balance sheet as auditors have decided the "economic risk" rests with the state. The majority is accounted for by the £16bn PPP to renovate the London Underground. It said the amount that would appear on the public finances when it publishes the final figures in September would be "much smaller" than £23bn as some deals are staggered over long periods while some debt has been paid off.

However, Mr Hawksworth said: "Given that net public debt has risen to its highest since September 1999 and that this ratio seems almost certain to rise, even a relatively small rise in net debt due to including PFI debt could bring the total close to the 40 per cent."

Doug McWilliams, the chief executive of the analysts CEBR, said: "On current trends, the Chancellor is set to break both his budgetary rules unless he can raise more tax revenue or bring public spending under control."

A Treasury spokesman said higher spending was distorted by grants to local authorities being paid earlier than usual, pointing to a reversal in July. "We are meeting our strict fiscal rules and will continue to do so," he said.