Budget deficit hits £8bn

The £8bn July budget deficit reported yesterday has pushed up overall public debt to £801bn, or nearly 57 per cent of gross domestic product. That is the highest level of indebtedness since records began in 1974 and bigger even than in 1976 when the UK was forced to turn to the International Monetary Fund for an emergency loan. The figure was particularly shocking given that July usually sees an inflow of funds, however tax levels have slumped dramatically. Corporation tax has been hit by falling company profits and VAT receipts have been declining since its reduction from 17.5 per cent to 15 per cent last year.

Debt on that scale will require severe fiscal tightening at some point and leaves the government bond – or Gilt – market vulnerable to collapse as record levels of bonds are issued. It also threatens Britain's status as a triple-A rated country, with ratings agency Standard & Poor's recently hinting it may downgrade the UK if debt continues to spiral, increasing funding costs further.

Public finances have suffered considerably from an increase in unemployment benefit, which increased by more than ten per cent compared to July 2008. And with employment levels predicted to fall further, more increases in outgoings are likely. On the other side of the equation revenues have been affected by the slump in the housing market, with stamp duty income hit by the drop in transactions, leaving the UK with the worst deficit of all Western economies this year and next, according to the IMF.

WHAT ARE THEY SAYING:

Michael Ben-Gad, deputy head of the economics department at London's City University on Bloomberg: "It's scorched earth. Whoever gets into government next will have to make very large cuts in services and also raise taxes. You'll end up with US levels of services and Scandinavian levels of tax."

Richard Snook, from analysts CEBR, in the Independent: "Borrowing for this financial year is likely to come close to £200bn, giving whichever government takes power in 2010 a once-in-a-generation challenge to bring the debt and deficit back down to manageable levels." ·