Brown 'must borrow £15bn' to fulfil pledges

Chancellor Gordon Brown may be forced to borrow an extra £15bn to fund public services improvements in the next three years, ministers fear.

Gloomy economic figures, buoyed only by the boom in high street and house prices, revealed last month that the economy had failed to expand at all for six months and was languishing at the bottom of the league of industrialised G7 nations.

Now, as the Chancellor puts together his Comprehensive Spending Review, detailing the Government's plans for investment in hospitals, schools, public transport and policing, there are real fears in government that he may have to increase borrowing levels to fund much-needed increases. The move would represent a U-turn by Mr Brown who has made a virtue of cutting national debt.

A minister said this weekend: "The growth figures were well below Gordon's 2 to 2.5 per cent target and the choices are simple – tighten up on spending, put up taxes or increase borrowing. We've already got the increase in national insurance contributions coming and the demands from the big spending departments – Education and the Home Office – aren't going to go away. On a back of an envelope calculation, it could be as much as £15bn more in borrowing."

City experts have also warned that the zero growth rate and flagging confidence in industry will have a negative impact. Professor Peter Spencer, economics director of the Ernst and Young Item Club that scrutinises Treasury forecasts using the same figures as the Chancellor, says Mr Brown could have to borrow between £10bn and £15bn more to fund his spending plans. He said, however, that was a "worst case scenario".

"What it hangs on now is whether or not the economy can recover from here. If it can the Chancellor will miss his targets but he won't be wide of the mark. But that, I'm afraid, is looking extremely unlikely." Professor Spencer warned that optimism was only being held up by the current housing and consumer trends and was "fast disappearing".

"We simply can't risk another 1990s-style collapse in the housing market, because it won't just be the optimism in the business sector, it will be the head speculation in the housing market that disappears. And at that time the Chancellor's Red Book just gets binned and you have to start again," he said.

Andrew Dilnot, Director of the Institute of Fiscal Studies, said: "The economy is going to grow less quickly than expected. If the economy were to grow much more slowly this year than was forecast, borrowing will rise more quickly than forecast."

Mr Dilnot said the Chancellor was equally likely to keep spending under control and may not propose "increases in spending over and above the sorts of levels he announced in the Budget".

Jonathan Loynes, the Chief UK Economist at Capital Economics, predicted that Mr Brown – reluctant to make big tax and spending decisions on the basis of one year's figures – would "let borrowing take the strain".