Brown to break golden rule

Government borrowing hit a record high last month, prompting speculation in the City that the chancellor may overshoot his uprated public borrowing forecasts this year.

City analysts were revising up their estimates for the full year's borrowing after the Office for National Statistics reported a cash deficit of £13.1bn up from £11.6bn in December 2002 and well above the consensus forecast of £11.9bn.

Separate figures from the Council of Mortgage Lenders showed that a remortgaging surge drove a record increase in secured borrowing last year.

"The December figures complete the picture of a truly extraordinary mortgage market in 2003," CML director general Michael Coogan said. "Total lending managed to increase by nearly a quarter compared with the previous year, and has more than doubled in three years."

Analysts said the deterioraton in the government's finances in December was partly because twice yearly interest payments on government debt fell due. Even on the smoothed out measure which the Treasury prefers to use for forecasting, borrowing is running well ahead of last year.

On a net basis the government borrowed £5.3bn in December, up from £4.5bn the previous year. Nine months into the current financial year, total borrowing stands at £36.1bn, nearly a third higher than at this point last year, and only half a billion short of the total Gordon Brown has set himself for the full year.

Analysts said he could overshoot his £37bn forecast and break his golden rule requiring him to match current spending with tax receipts over the economic cycle. "The tax base is still soggy," said Richard Iley at BNP Paribas. "On the public finances current trajectory, the golden rule will be broken by next June."

Household borrowing also rose last month, according to figures from the British Bankers' Association. Lending secured on dwellings rose by a £5.4bn last month, more than in November but considerably less than the record £6.1bn increase reported in October.

The figures were released as the Bank of England revealed it considered a surprise rise in interest rates this month to shock consumers into reining in spending. The monetary policy committee actually voted 8-1 to keep rates at 3.75%.

The lone dissenter, Sir Andrew Large, the Bank's deputy governor, argued that a surprise rise might have more of an impact on consumer borrowing, which Bank officials believe is still worryingly high.

The hawkish tone of the minutes had City analysts betting that next month's quarterly inflation forecast could pave the way for a rate rise.

"January's minutes leave us in little doubt that, at the time of the meeting, a majority of members was minded to raise rates in February," said Adam Law, UK economist at Barclays Capital.

The February inflation forecast will be the Bank's first using the new measure of the cost of living, introduced in last month's pre-budget report. The consumer price index is rising at 1.3% a year, well below the Bank's new 2% target.

· Britain's economic performance over the past four years has been on a par with the EU's most dynamic economies such as Denmark and Sweden, the European commission said yesterday.