Borrowing binge after slowdown in London

The Chancellor admitted in the Budget that he will have to borrow £43 billion in 2008-9 - far more than the £30 billion predicted by his predecessor Gordon Brown just 12 months ago.

It was part of a massive borrowing binge outlined by Darling as he desperately tried to raise cash to fund lavish spending plans and compensate for a shortfall in tax receipts as a result of the economic slowdown.

Experts today said London was responsible for half of the shortfall and warned borrowing could spiral to more than £50 billion a year - exceeding the grim record set by Tory Chancellor Norman Lamont in the wake of the recession of the early Nineties.

Professor Douglas McWilliams, chief executive of the Centre for Economics and Business research, said £6.5 billion of the £13 billion rise in borrowing was due to the slowdown in London.

"There is a dispropotionate impact from London because London's economy is so much more tax intensive," he said. "It is one of the main causes of the £13 billion increase in borrowing.

"We estimate that at least £6.5 billion of it will be due to the weakening of the London economy."

He said economic growth in London will slow from 3.6% in 2007 to just 1.4% this year - a far more dramatic decline than the rest of the UK where Darling expects growth to fall from 3% last year to 2% this year.

Average earnings in the capital are far higher than elsewhere in the country and City firms such as banks and brokers account for a third of the UK's corporation tax receipts. Meanwhile, nearly every house in London qualifies for stamp duty, earning the Treasury billions every year.

Job losses, economic decline, and a slowdown in the housing market this year will decimate tax receipts from the capital in particular.

Roger Bootle, economic adviser to Deloitte, said: "The position of London is far worse than for the UK economy overall."

Borrowing in the next two years will hit £81 billion - according to the Chancellor's estimates - £23 billion more than Brown predicted a year ago.

Professor Peter Spencer, economic adviser to the Ernst & Young Item Club, said Darling was forced into the borrowing binge because "despite years of plenty, the cupboard was bare".

He said borrowing could now spiral above £50 billion a year - meaning Darling will break the debt record set by Lamont in 1993.

"Tax revenues will follow the credit markets and the economy down, risking a major overshoot in public borrowing," said Spencer.

"We think it is very likely that he will exceed the record £50 billion set by Norman Lamont.

"His economic forecasts are decidedly optimistic - particularly the 2.25%-2.75% for next year - prone to a much weaker housing market and High Street.

"This is not the last time he'll be raiding the drinks cupboard."