Alistair Darling will borrow an extra £13 billion next year to keep the country running after his tax-take from the City is slashed as a result of the credit crunch.

In his Budget on Wednesday, the Chancellor said that he would have to borrow £43 billion in 2008-09, well ahead of the £30 billion borrowing predicted for the period by Gordon Brown last year. Economists said yesterday that a downturn in the City’s finances had contributed about £6.5 billion to the extra £13 billion that the Chancellor will require to cover public spending.

As credit markets remained nervous yesterday, economists said that Mr Darling could be forced to exceed the debt record of £50 billion borrowing in one year, set by Norman Lamont.

The City’s banks and other companies pay a third of Britain’s corporation tax. With their profits hit by the global liquidity crisis, the Exchequer’s corporation tax take is likely to fall. At the same time, stagnant salaries, job losses and the resulting flat house prices will also see tax receipts drop.

Rose-tinted specs fail to offer hope

The obvious justification for Mr Darling’s relatively upbeat scenario is that the outlook is fraught with uncertainty

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

The Chancellor delivers a modest Budget

As so often is the case, virtue, in terms of improving public finances, is not now, but at least a year away

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Douglas McWilliams, chief executive of the Centre for Economics and Business Research, said: “Because of the very tax-rich nature of financial services, with income tax, corporation tax, stamp duty and tax on bonuses, a downturn in the City has a disproportionate effect on the Government’s finances.”

Peter Spencer, tax adviser to the Ernst & Young Item Club think-tank, said that 2007 was the “last of the years of plenty” for the Government. “Already the pendulum is swinging the other way,” he said.

Professor Spencer predicted that the Chancellor would exceed Mr Lamont’s record borrowing. He said: “We think that this is just the beginning, not the end, and that this weakness will be more serious than the Government thinks and will last a lot longer.”

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