Brown forced to go £5bn deeper in red

Gordon Brown will announce a sharp increase in the Government's borrowing today but will defend his decision to go much deeper into the red as the right course for the British economy.

Presenting his pre-Budget report in the Commons, the Chancellor will reject criticism that his economic strategy has been blown off course. He will declare that the alternatives of cutting spending or raising taxes would only worsen the slowdown.

Mr Brown, who forecast public borrowing of £11bn for the current financial year in his Budget in April, is now set to raise his estimate by between £4bn and £5bn. For 2003-04, the increase is likely to be even bigger, rising from the £13bn predicted in April to around £20bn.

The Chancellor will blame the problems on the global downturn, and will admit that the British economy will not achieve his forecast of growth of between 2 and 2.5 per cent this year. The City anticipates growth of 1.6 per cent.

Facing his most difficult test in his five years at the Treasury, Mr Brown will be armed with a battery of figures aimed at heading off Tory criticism that the rise in borrowing will put the economy on an unsustainable course. He will point out that as a share of national wealth, Britain's borrowing will still be less than that of the United States, Germany and France.

Mr Brown will argue that the higher-than-expected borrowing is due to temporary factors rather than a flawed strategy, as the Tories will claim. He will insist Britain is in a stronger position than many other countries to weather the most serious global storm in almost 30 years, and deny that the extra borrowing means he has abandoned his "prudent" approach.

Sir Edward George, the governor of the Bank of England, told the Commons Treasury Select Committee yesterday that there were no signs of a "serious black hole" in the Government's accounts. He said higher public sector spendinghad come at an opportune time. "It's rather fortunate that the public sector is expanding in this environment ... particularly with downside risks to consumer spending, public spending is clearly a support," he said.

However, economic analysts will pour over today's draft Budget for evidence that higher borrowing is due to the huge injection of money into public services rather than the worldwide economic gloom. Some experts have already predicted that Mr Brown will be forced to raise taxes or cut spending in the next few years.

On the sixth day of the firefighters' strike, Mr Brown will take a hard line on public sector pay, warning that the extra billions for public services must not be swallowed up by inflationary pay awards.

Although most attention will focus on his new economic forecasts, the Chancellor will announce measures to boost enterprise, skills and training, including the setting up of 2,000 "enterprise areas" in rundown parts of the country. He will unveil a £60m scheme under which every school pupil will have five days of "enterprise education" by 2006 after an inquiry by Sir Howard Davies, chairman of the Financial Services Authority.

Mr Brown will also promise to crack down on the workshy, who will face the loss of benefits through a more pro-active approach by Jobcentre staff. However, the Chancellor will not announce immediate plans to close a loophole that lets millionaires living in Britain escape big tax bills by saying that the UK is their second home.

The Chancellor was warned by British business yesterday that he could no longer use industry as a "cash cow". Digby Jones, director general of the Confederation of British Industry, said at its annual conference in Manchester: "Ministers cannot keep siphoning off company funds without damaging investment, productivity and competitiveness.... The Government must give first priority to business tax cuts."