Graphic: Britain goes into the red

The Treasury suffered a record £16 billion plunge into the red last month as the recession hit tax revenues.

The news came as the pound fell to a low against the euro, and the rapidly worsening state of the Government's finances added to anxieties about Britain's long-term prospects.

Sterling's latest losses left the pound worth as little as €1.0541 as it fell closer to parity with the single currency.

The economic downturn undercut receipts of income tax, national insurance, VAT, stamp duty and company and capital gains taxes while driving up benefit costs as unemployment has risen. The number of people claiming unemployment benefit rose by 75,700 this week to 1.07 million. The widening gap between tax revenues and increased spending last month led Alistair Darling to borrow £16 billion to plug the gap. This was almost double the amount borrowed in the same month last year, and the highest since monthly records began in their present form in 1993.

It is only weeks since expectations of a deep recession next year forced the Chancellor to raise his forecast for borrowing this financial year to £77.6 billion, from the £42.5 billion projection in his March Budget. Mr Darling also raised his borrowing expectations for 2009-10 further, to £118 billion, or 8 per cent of national income.

Yesterday's worse-than-expected figures for November led economists to suggest that the Chancellor may be forced to raise his borrowing to a level not seen in modern times. “While alarmingly high, the Government deficit projections in November's Pre-Budget Report are already looking too low as the recession looks certain to be significantly deeper and longer than the Government has forecast,” Howard Archer, chief UK economist at IHS Global Insight, a consultancy, said.

Mr Darling has conceded that the economy will shrink next year by up to 1.25 per cent, but is pinning his hopes on a robust recovery in 2010, with predicted growth of between 1.5 per cent and 2 per cent. Many analysts fear that the economy will contract by 2 per cent or more next year, followed by a weak revival in 2010, with growth of less than 1 per cent.

John Hawksworth, of PricewaterhouseCoopers, the accounting group, predicted yesterday that the Chancellor would have to borrow £82 billion — 5.6 per cent of GDP — in 2009-10. This would climb to £130 billion in 20010-11, equivalent to 8.9 per cent of GDP, taking borrowing above the 8.1 per cent reached in 1974-75, when Denis Healey was Chancellor.

The scale of the mounting stresses on government finances was evident in the detail of yesterday's dire figures.

Tax receipts from companies and individuals last month fell 5.2 per cent compared with the same time last year. That compares with Mr Darling's forecast for tax revenues to drop by only 0.6 per cent in 2008-09 as a whole, and by 3 per cent in the second half of the financial year.

VAT payments fell 5.1 per cent compared with November last year. Even after last month's cut in VAT to 15 per cent, Mr Darling is predicting a fall of only 0.4 per cent in VAT revenues for the period from last month to March.

While Mr Darling's tax revenues wilt, government spending continues to grow, driven by rising welfare bills. Total spending, excluding capital projects such as building roads, hospitals and schools, rose 6.2 per cent last month, while social security spending was up 7.1 per cent.

“The public finances look pretty awful,” said Vicky Redwood, of Capital Economics. “It's just worrying that they are that bad this early on in the recession.”

The Government's financial state is aggravating a sharp sell-off of the pound as market concern grows over Britain's worsening economic predicament. Yesterday the pound dropped by another 2 euro cents from its closing value on Wednesday to hit €1.0541, leaving the euro worth a record 94.86p at one point.

The pound also surrendered some of its gains registered against the dollar this week, shedding 0.9 cents to close in London at $1.5339, leaving the trade-weighted index of sterling's overall value close to a record low at 76.7.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts