THE government looks on course to substantially overshoot its borrowing limits for the full financial year, giving rise to speculation that taxes will have to increase if the economy fails to pick up significantly.
The top-line figures for Sept-ember looked dreadful, with the cash measure of borrowing (PSNCR) coming in at (pounds) 8.6bn last month. This - the highest September number yet, and much more than the consensus forecast of (pounds) 6.6bn - was more than (pounds) 3bn worse than last year.
On a stand-alone basis, the monthly net cash requirement is generally regarded as less sig-nificant than other measures, as it is hugely variable and can be distorted on a month-to-month basis by timing factors.
For example, by the preferred accruals-based Public Sector Net Borrowing (PSNB) definition, borrowing fell to (pounds) 2.8bn - slightly less than markets had expected.
Nonetheless, economists noted that this still left a cumulative PSNB deficit of (pounds) 22.5bn just six months into the current financial year. This was the highest figure recorded for nine years, and represents more than 80% of the (pounds) 27bn shortfall forecast by chancellor Gordon Brown for the whole of the current fiscal year.
The surge in borrowing has come as spending on public services has increased during a period of economic weakness, cutting into the tax revenues the government had expected.
While spending in areas other than capital investment is rising at about 10%, receipts from income and other forms of tax are increasing by only 3.1%, compared to expectat-ions of 7.8% at the time of last year's budget.
Jonathan Loynes, chief UK economist with Capital Economics, said yesterday that borrowing would exceed (pounds) 40bn this year if these trends continued. However, he added that things were unlikely to be that bad, as the Treasury should be able to rein in some spending during the coming months.
''But we are still expecting a deficit of around (pounds) 37bn - (pounds) 10bn higher than the chancellor's budget forecast - and things will probably get worse next year when the budget arithmetic relies on a very strong accelerat-on in GDP growth,'' Loynes added.
''Without a very rapid pick-up in the economy over the next year or two, hefty tax increases will almost inevitably be needed to meet the chancellor's own fiscal rules.''
Among other things, these rules call for PSNB to stay below 40% of gross domestic product over the economic cycle. Based on the September figure, debt now accounts for 31.9% of annual GDP.
''It is a very disappointing set of numbers,'' said David Page, an economist with Investec.
''With the focus on public borrowing, the chancellor is going to have a lot to do to come anywhere near his forecast this year.''
A junior minister insisted yesterday that the government would meet all of its spending commitments while also staying within its fiscal rules.
However, the comments from Ruth Kelly, financial secretary to the Treasury, stopped short of saying the government would meet its targeted maximum deficit of (pounds) 27bn for the full year.
Although Kelly also downplayed the possibility of fresh tax increases, many economists believe this will be an inevitable consequence of overshooting the deficit.
David Kern, economic adviser to the British Chambers of Commerce, believes the deficit in the current year could total between (pounds) 35bn and (pounds) 38bn.
He said yesterday it was ''critical'' that any ensuing tax rises not fall on the business sector, as this would cause serious damage to the economy.
''Even if, as we hope, tax increases can be avoided, there is a clear risk that the sheer size of the deficit will create a difficult and unpropitious background for the Bank of England's monetary policy committee when it considers the future of interest rates,'' Kern said.
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