City left reeling as national debt hits ‘dire’ £800 billion

Economists said they were shocked by the pace of deterioration in the national finances as it emerged the Treasury was forced to borrow a record £8 billion last month to keep public services going.

The total was almost twice as bad as the City predicted and means Alistair Darling's Budget forecast of £175 billion for the whole financial year looks increasingly optimistic.

July is normally a strong month for the public purse because it is when the Treasury receives quarterly company tax payments. In July last year the Government enjoyed a £5.2 billion surplus and last month's deficit was the first since 1996.

Today's figure brings total net borrowing to £49.7 billion in the four months of this financial year, compared with £15.9 billion last year.

The nation's debt, at £800.8 billion, accounts for 56.8 per cent of GDP. It has raced from £700 billion to £800 billion in nine months compared with the 290 years it took to build up the first £100 billion.

Economists said tough decisions on public spending cuts or higher taxes were unavoidable, but there was a risk of a double-dip recession. David Buik of brokers BGC Partners said: "Public expenditure will be cut — Labour or Tory — and taxation must go up.

This means less disposable income and Johnny will have to put up with just one Man Utd strip next year."

He also said improved mortgage lending and retail figures, announced today, "may just be watery sunshine before the cumulonimbus clouds of despair hover over the economy".

The shortfall in government finances was the result of a massive slump in tax revenues combined with still-rising public spending, inflated by benefit payments to the growing numbers of unemployed.

Corporation tax revenues, which were flattered last year by higher oil prices, were down to £6.2 billion from £9.9 billion in July last year. Income tax for the month was down 15 per cent, while VAT takings were reduced by 34 per cent.

Public sector spending, including unemployment payments, was up 10.4 per cent. Total receipts, including all taxes and interest earnings, were down 15 per cent from last July, the biggest decline since 1998.

The Treasury said the large deficit in July was expected and caused by the recession. Economists said the public finances were "dire" and that urgent action was required to control borrowing.