Twin blow to Brown over borrowing limits

Gordon Brown's hopes of meeting his cherished rules on the public finances were dealt a double blow yesterday, as borrowing was revised up and it emerged the Government might have to account for debts held on public finance initiative (PFI) projects.

The developments took the shine off figures for April showing that a surge in tax revenues had got the new fiscal year off to a good start.

The Office for National Statistics said the cumulative current budget surplus so far in the five-year economic cycle was £2bn lower than first thought. Analysts said this cut the margin for error for meeting the golden rule - that current spending must equal current tax revenues over the cycle - from the £6bn Mr Brown announced in the Budget to £4bn.

The ONS also confirmed it was looking at accounting for some of the 700 PFI projects, worth £42.7bn, so they are included under public sector net debt. This could put the Treasury in breach of its second fiscal rule on sustainable debt that says the stock of public debt, currently at 34.5 per cent of GDP, will not rise above the 40 per cent ceiling.

The ONS was forced to issue a statement saying no decision has been taken to change the treatment of PFI schemes but said it would involve an imputed lease cost, which would be "much smaller" than the full capital value.

Colin Mowl, at the ONS, said: "We have not taken any formal decision. It will take at least six months for us to have a decision, and even if we decide to include these figures they will be smaller than the report suggests."

The Conservatives said it was another reason why the Chancellor should not be "judge and jury" on whether he has met his rules.

Mark Richards, at Lombard Street Research, said: "The implications of any reclassification of PFI schemes are clearly a sensitive issue. The ONS is correct to issue a response, but their reaction simply highlights how critical 'off balance sheet' spending has been to maintaining Mr Brown's fiscal rules."

Data for April showed tax receipts were 9 per cent higher than a year ago, above the Budget forecast for 8.4 per cent for 2005-06 as a whole. It was driven by a leap of 16 per cent in income tax - ahead of target - but was offset by a rise of 9.7 per cent on corporation tax receipts that were below Treasury forecasts.

Growth in VAT receipts fell 8 per cent, although the ONS said this was linked to the timing of Easter affecting shopping behaviour in the two years.