BRITISH consumers’ relentless appetite for debt could lead to a severe economic downturn and a return to the agony of Eighties-style negative equity, economists and politicians cautioned last night.

Speaking after the publication of new figures that show household borrowing is soaring, Vincent Cable, the Liberal Democrats’ spokesman on trade, warned householders to prepare for “an almighty crash”. He called on banks to rein in their lending to consumers, adding that “a slight downturn in the economy” could lead to “negative equity, repossessions and record levels of bankruptcy”.

Data published yesterday by the Bank of England revealed that personal debts surged by a record £10 billion in June as the nation carried on borrowing with abandon.

Undaunted by uncertain economic prospects, households pushed consumer credit up by £2.2 billion, setting a record as they continued to reach for credit cards and take out new bank loans. Mortgage lending also staged a record monthly rise, climbing £7.8 billion after allowing for repayments.

The borrowing spree pushed June’s annual pace of increase in personal lending up to 14 per cent, its highest since 1990.

Fears in Westminster that mounting debt levels will spark an abrupt correction as consumers stop spending and start to pay back what they owe were echoed in the City.

Michael Saunders, of Citigroup, said: “This credit boom can go on for a while. But, long-run, there must be concerns over the quality of economic growth, which is heavily reliant on a debt-driven consumer boom.”

One trigger for a retrenchment could be weakening incomes, with new data showing that Gordon Brown’s national insurance rise is biting into pay packets.

Michael Howard, Shadow Chancellor, said: “When tax rises reduce real incomes, people have to choose between spending less and borrowing more. Faced with this uncomfortable choice, they want to know why they’re not getting the improvements in public services they were promised in return for higher taxes.”

The lending surge also cast doubt on the Bank of England’s gamble that slowing house prices would limit the risk that this month’s interest rate cut will stoke borrowing.

With some members of the Bank’s Monetary Policy Committee worried over “unsustainably high” rises in lending, analysts said yesterday’s figures all but put paid to any chance of a rate cut next week.

House prices rose by a still robust 1 per cent in July, easing their annual pace of increase to 17.9 per cent, the Nationwide building society said.

Nationwide argued that the housing market was on course for “a soft landing” but said that the number of first-time buyers joining the property market this year was set to fall to its lowest in two decades.

If consumers were suddenly to retrench, this would leave the economy even more reliant on Mr Brown’s government spending drive. The big role of public spending in sustaining growth was underlined by figures showing that Labour has hired 344,000 people for the state sector since 1997. The Government now employs one in five workers.

But the sustainability of Mr Brown’s spending programme is being called into question by economists who forecast that he is set to overshoot his borrowing forecasts by billions.