Borrowing surge stuns City as George Osborne wields axe

Osborne said the nation's debt interest payments would hit £63 billion by 2014/15 but added that the deficit-busting spending review would knock
£5 billion off the bill over the next four years. "It takes time to turn around the debt supertanker," the Chancellor said.

He said Britain was "confronting the bill for a decade of debt" and added: "To back down now and abandon our plans would be the road to economic ruin."

Treasury gilt yields spiked at 2.997% as Osborne delivered his debt warning before they eased back. CMC Markets analyst Michael Hewson said: "On the evidence so far, the City seems fairly relaxed with it. If yields head above 3% then people are selling gilts."

The spending assault was given added urgency by alarming figures on the public finances. Net borrowing hit £16.2 billion in September, more than £2 billion higher than City fears and the worst for the month since official records began in 1993.

The surge pushed total borrowing for the financial year so far to £73.5 billion, almost as high as a year earlier when the UK was still mired in recession.

The independent Office for Budget Responsibility forecasts £149 billion in net borrowing this year, or 10% of the nation's entire economic output, but experts warned the risks of an overshoot were growing following the dire numbers.

Barclays Capital chief economist Simon Hayes warned borrowing could hit £156 billion by the end of the year, £7 billion above the OBR's June forecast and at the same high level as last year.

The figures showed a £1.2 billion hike in VAT and income tax receipts scrubbed out by rising benefit payments as well as the Government having to shell out more on servicing its huge debt pile, which is now £155.4 billion higher than a year ago at £842.9 billion.

The interest bill reached £2.3 billion last month, against £0.9 billion a year ago, as payments on index-linked debt rose due to higher inflation.

The figures came as minutes of the Bank of England's latest policy meeting revealed the first three-way split among rate-setters in more than two years as the debate rages over inflation and the health of the UK recovery. Committee dove Adam Posen called on the Bank to fire up the printing presses again with an extra £50 billion in quantitative easing, warning that weak growth could permanently damage the UK's potential capacity.

Former MPC member David Blanchflower today called the cuts "the greatest error seen in our lifetime". He said a double dip into the red was inevitable following the comprehensive spending review, with growth not strong enough to create jobs.

Blanchflower spoke at Buckingham Palace after being made a CBE for services to the Bank of England. He said: "I've already called it the greatest macro-economic mistake in years. There's no example in history where such a thing as this has ever worked. The only examples in history is where you've done this and it's failed.

"It generates double dip recession, this looks like the greatest error we've ever seen in our lifetime in economics."

BANKS AWAIT DETAILS OF £2.5BN LEVY

Banks will learn full details of the £2.5 billion a year levy they will be forced to pay when legislation is published tomorrow. Osborne said: "We neither want to let banks off making a fair contribution nor do we want to drive them abroad." The Chancellor said that the levy would raise more each year than Labour's one-off bankers' bonus tax which collected over £2 billion.

The British Bankers' Association said banks "fully understand they have a role to play in the UK's economic recovery". it added: "Decisions taken today will have an effect on the whole industry and to remain competitive, UK policies need to be in step with those elsewhere. Financial services currently contribute around £24 billion in taxes every year so we are pleased the Chancellor said he wishes to balance taxation with the attractiveness of the UK as a global financial centre and the need to retain jobs."

ALARM AT TAX FRAUD CLAMPDOWN PLANS

Tax experts expressed concern about planned changes to the HMRC budget. The Government cut it by 15% but earmarked an extra £900 million to target tax fraud. "This will encourage tax inspectors to adopt an increasingly aggressive stance, which could leave many innocent people being challenged unfairly," said Cormac Marum of accountants Harwood Hutton.

TREASURY FEELS PAIN OF CUTBACKS

One of the biggest cuts is to the budget of the Treasury itself. Spending on staff, rent and other office expenses will be slashed by 33%. This will be achieved by ditching certain arms of the bureaucracy, such as the Gordon Brown-created Infrastructure Finance Unit, and by renting out sundry office space supposedly available at 1 Horse Guards Road, the Treasury's lavish offices near St James's Park.