Alistair Darling admitted today that the nation’s finances are now set to plunge at least £20 billion deeper into the red as a sharp slowdown in the economy this year, and still anaemic growth in 2009, take a severe toll on tax receipts flowing into the Treasury.

Despite relatively modest cuts to his growth forecasts, the Chancellor was forced to reveal a severe toll on the Government’s finances as the housing market downturn, weaker consumer spending, rising unemployment, and tougher times for the City hit tax revenues from stamp duty, VAT, and income tax.

The heavy blow to tax receipts from weaker growth was almost entirely to blame for still more very steep increases in the Treasury’s borrowing plans as the public finances slide even deeper into the red on future plans.

Borrowing totals were also swollen by a £3 billion rise in social security bills over 2009 and 2010 due to higher costs for benefits blamed on a combination of rising unemployment - expected to climb back to 1 million by 2010 - and higher inflation meaning bigger increases in welfare payments.

BACKGROUND

• Darling's first Budget: the main points

• The Chancellor's speech in full

• Darlings first Budget: the reaction

• Chancellor hits the home budget as his debts soar

• Need to know: Budget 2008

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A further £2.4 million on top will be added to the cost of tax credits, due again to inflation as well as the Government’s renewed effort today to cut child poverty.

Mr Darling will now have to borrow £7 billion more in the new financial year 2008-09 than he expected in his October Pre-Budget Report, lifting borrowing to £43 billion, compared with £36 billion expected in last year's autumn pre-Budget Report and just £30 billion in last year's spring Budget. In 2009-10, he will again borrow £7 billion more than previously planned.

Although the Chancellor was able to confirm that borrowing this year of £36 billion was a little under £2 billion less than he had expected in October, it was still above Gordon Brown’s £34 billion estimate last spring - marking the sixth year out of seven that Budget borrowing forecasts have been breached.

In total, today's Budget added an extra £20 billion to total government borrowing plans from this year up to 2011. Compared with Mr Brown's final Budget, delivered last year, borrowing over these four years will be £34 billion more than the Prime Minister planned just a year ago.

There was little sign in the Budget of the measures to support growth that the Chancellor promised before yesterday’s statement, which would have spelled significant tax cuts or spending increases.

Today’s measures taking effect this year were broadly neutral, while Mr Darling gambled on raising taxes by £800 million next year despite the weaking economy as he sought to shore-up his strained financial position. On top of other tax rises last October worth £300 million, this meant an extra £1.1 billion in tax next year.

In 2010-11, the Chancellor now expects to raise an extra £1.9 billion in tax, on top of the £0.95 billion announced last October.

Economists are likely to see these small further tax increases as a dangerous gambit, adding to a slowdown in government spending from this year in further tightening the screws on an already weakening economy.

The Chancellor fulfilled City expectations in his statement as he downgraded his forecasts for the economy’s performance this year for the second time in six months, and also conceded that growth next year will now be weaker than he had hoped.

Mr Darling cut a half of a percentage point off his projection for economic growth in 2008 to a range of 1.75 to 2.25 per cent, down from his October expectation that GDP would rise by 2 to 2.25 per cent.

The downgrade brought the bottom end of the Treasury’s forecast into line with the average City view of how the economy will fare this year, and with the Bank of England’s expectations, but some economists sounded warnings that it was still too rosy. The gloomiest mainstream City forecasts expect growth this year to more than halve from 3 per cent in 2007, to as little as 1.2 per cent amid fears of a recession.

Some City economists also attacked the Chancellor’s forecast for next year as likely to prove over-optimistic, after Mr Darling lowered this by a modest quarter-point, to a range of 2.25 to 2.75 per cent. City forecasts for 2009 range from 1.7 to 2 per cent, with mounting anxieties that the eventual outcome could be much worse if the global downturn and worldwide credit squeeze continue to deepen.

Economists said that the stress on the government's finances was underlined by a further worsening in the Treasury's current budget measures, which cover all day-to-day spending after excluding investment on areas like roads and hospital and school buildings.

The lion’s share of the new tax rises unveiled today by the Chancellor will be borne by motorists and drinkers.

By introducing an escalator for alcohol duty similar to the one that controversially used to apply to road fuel, the Chancellor plans to bring in £1.5 billion over the next three years in extra tax on beer, wine and spirits.

Higher fuel duty from 2010 will raise £270 million a year. New, higher rates of road tax with heavier duty for "gas guzzlers" will raise £465 million in 2009-10, rising to £735 million in 2010-11. Scrapping the difference in duties paid for biofuels raises an extra £550 million in 2010.

Steep and escalating rises in alcohol tax will raise £400 billion this year, rising to £500 million next year and £625 million in 2010.

The Chancellor again turns to the oil companies as a rich source of revenues, with a crackdown on what the Treasury regards as tax abuses due to raise nearly £500 million over three years starting this year.

Other businesses are hit by a raft of technical and detailed tax-raising measures. In particular, an overhaul of the regime for taxing UK companies' foreign profits brings an extra £150 million in for the Treasury this year and next, falling to £100 million in 2010. Changes to VAT rules related to companies' hiring of staff is expected to raise £150 million in 2009 and £125 million in 2010. A raft of smaller moves to toughen the tax regime and crackdown on avoidance are designed to bring in more than £250 million in 2009 and a similar amount in future years.

Overall the Budget was broadly neutral, leaving taxes as a whole largely unchanged this year, with a nugatory net tax reduction of £140 million. But the tax increases planned for next year and the year after suggest that not only was Mr Darling forced to try to bolster strained government finances, but also that he and the Prime Minister may be attempting to start to build a warchest for the next election.

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