Brown setback as deficit hits £10.8bn

GORDON Brown's reputation for prudence suffered a fresh blow today from news that the public finances plunged deeper into the red last month than in any other September on record.

Rising Government expenditure pushed the Treasury's coffers £10.8bn into deficit - the biggest September shortfall since records began in 1984.

Extra cash for British troops in Iraq, as well as for schools at the start of the education year, was the main reason for the spending blowout.

Midway through the financial year, public sector cash borrowing stands at £22.75bn, more than half the £33bn Brown has forecast for the full year.

Economists said his Golden Rule - to borrow only to invest over the economic cycle - was now under serious threat. That implies that taxes will have to rise shortly after the General Election to plug a black hole in the public finances.

Jonathan Loynes, an economist at Capital Economics, said: 'The current budget is on track to overshoot the Chancellor's Budget forecast by some £11bn.

'This would use up the entire margin for error built into the current fiscal plans, so any further deterioration in the second half of the year would leave the Golden Rule broken unless Brown changes the rules by, for example, altering the timing of the economic cycle.

'The Chancellor is unlikely to respond to this danger ahead of the General Election, but taxes are almost certainly set to rise after it,' he added.

Malcolm Barr at JP Morgan is pencilling in a £34bn deficit for the financial year but said this assumes an upbeat view of economic growth, boosting tax receipts.

'With growth decelerating much faster and earlier than expected, the surprises on the fiscal data are likely to remain on the downside,' he said.

A Treasury spokesman said: 'We remain on track to meet our strict fiscal rules.'

Today's worrying data come just days after Ernst & Young said Brown's forecasts for tax revenues were too optimistic and he may break his Golden Rule.

The accountancy firm's ITEM Club said the Chancellor will undershoot his tax-take projections by about £6bn.

The International Monetary Fund last month urged Brown to cut spending or raise taxes before the public finances spiral out of control.

The Institute for Fiscal Studies has long argued that taxes will have to go up by at least £13 a year - roughly equivalent to 4p on income tax - if the Chancellor is to meet his fiscal rules.

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