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The public finances fell to a record deficit last month, driven down by a weakening economy and government overspending, and analysts say much worse is to come as the economy tips into recession.
The Office for National Statistics said public sector net borrowing was higher than expected at £8.1bn last month, a record for a September and almost double the £4.8bn shortfall of September 2007.
That left the cumulative borrowing for the first half of the 2008/09 fiscal year at £37.6bn compared with £21.5bn in the same period a year ago and the highest since records began in 1946.
"The September public finances were dreadful, deteriorating even more than expected," said Howard Archer, economist at consultancy Global Insight. "This highlights the extremely poor state of the public finances as they are hit by past largesse, the marked economic slowdown ... weak housing market activity, rising unemployment and government policy concessions since the March budget."
In his March budget Alistair Darling forecast a shortfall for the 2008/09 fiscal year to March of £43bn. But yesterday's figures show that total has been almost reached halfway through the year, meaning he will have to increase the figure in next month's pre-budget report.
In a Commons statement yesterday the prime minister, Gordon Brown, also signalled that the government's fiscal rules - designed to stop public finances spinning out of control - may be abandoned.
Arguing that British net public debt is well below European levels, he said greater borrowing was justifiable to avert an economic downturn. "Like all governments across the world, we are considering how fiscal policy can support the economy at this time," he said. "Carefully targeted, rigorously worked-through investments that help people fairly through the downturn and lay the foundations for stronger growth in the future.
"And in Britain's case we can start from the position of low public debt."
David Cameron said a further public spending splurge was wrong and said Britain could be heading for a record budget deficit.
Brown said: "With interest rates low and falling, inflation expected to come down over the next year, these underlying economic indicators - particularly interest rates - make us stronger than at any other previous downturn.
"Debt has been considerably lower than a decade ago, and lower than all G7 countries except Canada, enabling the government to increase borrowing at the right time to support the economy.
Nick Clegg, the Liberal Democrat leader, said Brown had ignored their advice for years about the "unsustainable nature of the credit and housing boom".
The Institute for Fiscal Studies said the growing deficit was down to spending running ahead of the March budget plans and tax revenues coming in lower.
"If these trends continue, public sector net borrowing will come in around £64bn this year," said Gemma Tatlow, an IFS economist. "If the government had acted earlier to address its repeatedly optimistic forecasts for public finances, we would not now be embarking on a recession with public sector borrowing and debt as high as they are."
She said it was right that the government was planning to let borrowing rise as the recession took hold. "But the pain cannot be delayed forever: once the current crisis abates, this government or its successor is likely to have to introduce a combination of new tax-raising measures and further spending cuts," she said.
The national debt ticked up to 43% of national income including the Northern Rock liabilities that are now on the public finances, or 38% if they are excluded.
One bright spot was that Northern Rock had reduced its impact on the national debt from £100bn to £82bn over the past nine months as it has repaid a significant chunk of its government loan.
The Ernst & Young Item Club, an economic thinktank, predicted that borrowing would reach about £60bn this year but rise to £92bn in 2009/10, equivalent to 6% of national income. Some economists are predicting it could be £100bn or more.
Philip Hammond, shadow chief secretary to the Treasury, acknowledged that "borrowing always rises when the economy slows", but added: "Gordon Brown's failure to prepare means that borrowing has reached record levels before we've seen the worst of the downturn."
The government's finances could be further undermined because of a fall in the tax revenues from big businesses.
According to a report by the House of Commons' public accounts committee published today about two-thirds of the corporation tax paid by the UK's 700 largest companies in 2005/06 comes from just three sectors: insurance, oil and gas - which has benefited from the high oil prices - and the banking industry, which has taken the brunt of the fallout from the global credit crunch.
Local authorities are also facing the prospect of falling revenues as a result of the downturn. One report suggests the slowdown could cut the amount paid through the business rate over last year and the current financial year by £2.5bn.
- Government Borrowing
- Economics
- Tax and spending
- Economic policy
- Recession
- Borrowing & debt
- Market turmoil
- Credit crunch
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