Alistair Darling admitted yesterday that the Treasury’s fiscal rules are under review as fears over rapidly worsening government finances were fuelled by a surge in borrowing to levels not seen since the end of the Second World War.

In the latest confirmation that the public finances are sliding into the red at an alarming pace, net government borrowing over the past quarter, the first of the new financial year, leapt to £24.7 billion.

The startling figure was up by two thirds from the £14.7 billion for the same time last year and a record high for this period.

In grim reading for the Chancellor, borrowing last month alone jumped to £9.2 billion, drastically up by almost £3 billion, or nearly 50 per cent, from the same month last year, and also setting a record for any June.

City economists said that the steep slide into the red by the Treasury underlined the scale of the strains on the Government’s finances as Britain’s deepening economic downturn undercuts tax receipts, forcing it to borrow record amounts.

Economists said that on present trends total public borrowing for the full 2008-09 financial year could surge to levels as high as £57 billion, and perhaps more, compared with Mr Darling’s March Budget forecast of £43 billion – a projection that was itself raised from £30 billion by Gordon Brown in his final Budget last year.

Philip Shaw, chief economist at Investec Securities, said that the figures were absolutely horrific and explained the Chancellor’s admission that the Treasury was now examining an overhaul of the self-imposed fiscal rules put in place by Mr Brown, which it is now on the brink of breaching.

City analysts said that the eventual borrowing total for the year might not fully reflect the severity of the jump over the past three months. However, they also sounded warnings that, with the economic downturn set to tighten its grip still further, the longer-term outlook for the Treasury’s finances looked bleak.

The toll on tax receipts from the weakening economy was spelt out in yesterday’s numbers. Total tax payments last month fell 1.5 per cent compared with the same time last year, against a Budget forecast for a 4.5 per cent rise over the full financial year. In June national insurance payments fell 8.3 per cent compared with a year earlier, VAT payments by 4.6 per cent and corporate tax payments were flat.

Treasury officials themselves are understood to be increasingly fretful over the worsening financial trends.

Mr Darling insisted that he had yet to reach a verdict on whether to overhaul Mr Brown’s two fiscal rules. The golden rule is that, over an economic cycle, the Treasury borrows only to fund investment, not day-to-day spending. The second rule limits the national debt to 40 per cent of GDP. “We have not reached any decision on that,” he said. “I said 12 months ago that we always keep these things under review.”

Economists said that some loosening of the financial straitjacket imposed by the rules, to permit higher borrowing during the economic downturn, seemed inevitable and unavoidable. Analysts said that some damage to the Government’s credibility with markets was also unavoidable.

“Altering the rules just before they are about to be broken does not show a great sense of timing,” Mr Shaw said. However, he added that the Treasury may emerge with a more sustainable regime.

In a further blow for Mr Darling, Sir John Gieve, the Deputy Governor of the Bank of England, admitted yesterday that Britain confronts a real danger of recession. “I can’t rule recession out,” he said in a speech in London.

But Sir John offered some respite for the Chancellor from the deluge of bad news when he echoed other recent comments from senior Bank officials in pouring cold water on the threat of interest-rate increases on which some financial markets have bet. He emphasised that the tightening lending conditions inflicted by the credit crunch had offset the boost to the economy from the Bank’s past three interest-rate cuts.

With this squeeze likely to intensify, Sir John said that must be taken into account when setting rates and would have meant further rate cuts if the Bank were not also grappling with the conflicting threat from rising inflation. In reality, he said that still-rising inflationary pressures from soaring commodity costs “raise the question [of] whether we should be raising rates rather than reducing them”.

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