Surge in public sector spending blamed for record deficit

A surge in Whitehall spending plunged Britain's public finances into a record deficit last month, raising a fresh spectre of tax rises and putting Gordon Brown on the verge of breaking his golden rule.

A surge in Whitehall spending plunged Britain's public finances into a record deficit last month, raising a fresh spectre of tax rises and putting Gordon Brown on the verge of breaking his golden rule.

The Treasury borrowed £9bn last month, the largest cash requirement for any November since records began in 1984, the Office for National Statistics said. The Government's preferred measure, public sector net borrowing, also overshot City expectations at £9.4bn, taking the shortfall so far this financial year to £32.7bn. This means the Chancellor is only £1.5bn away from hitting his revised £34.2bn borrowing forecasts for 2004/05 with four months of the financial year still to go.

Economists warned that unless Mr Brown raised taxes to plug the looming black hole in the Government's coffers he would miss the targets he set just three weeks ago in the pre-Budget report.

Jonathan Loynes, at Capital Economics, predicted borrowing would surge to £40bn this year, adding: "All this leaves the golden rule in real danger of being broken and we continue to expect tax increases in the order of £10bn per annum after the next election."

Mr Brown's golden rule forbids him from borrowing except to invest over the 1999 to 2006 economic cycle. "We expect the golden rule, as currently defined, to be broken next year," John Butler, at HSBC, said.

In a separate pre-Christmas blow for homeowners, mortgage lending slumped to its lowest level for three years last month, while the number of year-on-year mortgage approvals dived 25 per cent.

Lending on secured dwellings rose by £4bn in November, the British Bankers' Association said yesterday, down from £4.7bn in October. The Council of Mortgage Lenders, which represents banks and building societies, said just 85,000 mortgage approvals were made during November. This was the lowest since 79,000 in February 2003, when the impending Iraq war dented confidence, and compared with 113,000 a year earlier.

A separate survey by the property website Rightmove showed asking prices on British homes dropped 0.3 per cent in the month to mid-December compared with a steeper 1.7 per cent fall in the previous period.

Mr Butler said: "Overall [yesterday's] numbers are a reminder of two key risks for 2005. First, the possibility that the pace of slowdown in the housing market continues, consistent with outright falls in nominal house prices. Second, a weaker-than-expected economic recovery would cause a marked and persistent deterioration in the state of the public finances."

The ONS figures showed government spending jumped by 17 per cent last month - the fourth consecutive month public spending has accelerated.

Whitehall sources said the increase was explained by extra spending on winter fuel payments last month. Meanwhile, tax revenues posted 15 per cent annual growth.

Oliver Letwin, the shadow Chancellor, said: "The interesting point about today's public finance figures is that government current spending growth has accelerated to 7.3 per cent. So far, the Chancellor's claims about reducing bloated bureaucracy have proved to be all talk. Spending on bureaucracy is rising faster and faster."

A Treasury spokesman said: "We are meeting our fiscal rules and will continue to do so."

Douglas McWilliams, the chief executive of the Centre for Economics and Business Research, said: "We still believe that he will miss his revised target by £7.5bn this year and by £13bn next year without fiscal tightening."

Meanwhile, a survey by the Royal Institute of Chartered Surveyors will reveal today that house prices are still falling at the fastest rate since December 1992 - the tail-end of the last property crash. It says the number of surveyors reporting a fall in prices outnumbered those seeing a rise by 48 per cent in the three months to November. New buyer enquiries were more stable, rising for the first time in eight months in London.