Britain’s current budget deficit for June was £7.6 billion, compared with £5.3 billion in the same month of 2007, according to the Office for National Statistics. This would mean that the UK’s public finances worsened faster than expected last month as the economic slowdown took its toll on tax revenues. Conse-quently, Treasury has begun preparing to reassess its fiscal rules.

The UK public finance figures help to explain why the government has decided it needs to loosen its fiscal rules. The public sector net borrowing requirement was £9.2 billion in June, much higher than expected, taking the first quarter figure to a record £24.4 billion, compared with £14.7 billion in the first quarter of last fiscal year.

“At this rate of increase, borrowing will come in at around £57 billion this year, almost £15 billion higher than the chancellor’s budget prediction. And this is before the slowdown in the economy has really had much effect”, said Jonathan Loynes at Capital Economics Limited, a London based research firm.

And this is before the slowdown in the economy has really had much effect. Some suspect that this exaggerates the underlying rate of deterioration, but it is looking increasingly likely that borrowing will overshoot the budget forecasts considerably this year. Elsewhere, annual M4 growth leapt from 10 to 11.5 per cent in June, reversing the downward trend of the last few months.

M4 lending rose by a huge £46 billion. But this probably reflects increased demand for bank lending as a substitute for other forms of finance which have dried up. Holdings of M4 by corporates have recently slowed very sharply, perhaps pointing to weaker company spending ahead.The major cause of deterioration in public finance is said to be the serious slow down in tax revenues. Revenues are expected to weaken further, since lower profitability and weaker consumer spending are likely to hit VAT and corporation tax receipt, while there is expected to be a sharp fall in stamp duty because of stagnant housing market.

The sudden jump in borrowing needs has brought Gordon Brown’s fiscal rules under severe pressure and the Treasury is working on plans to replace these rules with a framework that would initially allow for increased borrowing.

Net debt was £555.3 billion at the end of June, equivalent to 38.3 per cent of gross domestic product. The ONS said it could not yet publish full figures incorporating the effects of Northern Rock’s nationalisation. But net debt, including the Bank of England and Northern Rock, was in June equivalent to 44.2 per cent of GDP.

With the government on course to break the rule limiting net public sector debt to 40 per cent of national income, a new framework is expected initially to be a bit loose. A consequence will be to make it easier to borrow more in the coming downturn, although the principle reason for the change is to restore confidence in the rules, so the medium-term budgetary position might be tighter than currently.

Last week Chancellor Alistair Darling, in an interview, warned that the downturn was far more profound than he had thought and that it could last for years rather than months. He said taxpayers were at the limit of what they are willing to pay to fund public services. He revealed that he told Cabinet ministers last week that there would be no more money for schools, hospitals, defence, transport or policing.

Laying bare for the first time the government’s assessment of the scale of the downturn, he said that Britain could still be suffering by the next election, expected in 2010.

On the vulnerability of banks, he said: “The real problem we are facing today is a consequence of the fact that too many banks at a very senior level didn’t understand the extent of the risk to which they had become exposed.”

The toll on tax receipts from the weakening economy was spelt out in ONS figures. Total tax payments fell 1.5 per cent last month 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 fell by 4.6 per cent and corporate tax payments were flat.

Meanwhile, July’s CBI Industrial Trends survey provided a fairly downbeat assessment of the outlook for the manufacturing sector, suggesting that the weakness in the financial and housing sectors is spreading to other parts of the economy. However, the lower pound is likely to mean that the export orders balance will probably hold up better.

Capital Economics Limited doubts that the clear weakening in demand will have had any impact on price pressures. The monthly price expectations balance remained close to its 13-year high in June and there has been little to suggest that it will not stay at this level, if not rise a bit further. The recent fall in the oil price offers some hope. But for the moment it has been suggested that output price inflation is likely to remain uncomfortably high for some time.

Meanwhile, Alistair Darling is expected to bow to pressure from business by scrapping contentious reforms to the taxation of foreign profits that threatened to provoke an exodus of companies from the UK .Proposals in the discussion document to impose a worldwide tax on “passive” income, such as royalties from intellectual property, provoked a backlash from leading UK multinationals.

Shire, the UK’s third-biggest pharmaceuticals company, and United Business Media, the publisher, this year decided to relocate their headquarters to Ireland for tax purposes.

Despite the taxation threats foreign investment into London has soared to a record high in spite of the credit crunch, the capital’s inward investment agency has revealed.

An unprecedented 178 international companies set up or expanded business in the capital in the year to March, contributing £710 million ($1.42 billion) to the capital’s economy. They hired 6,152 people, two-thirds more than in 2006-07.

The world’s largest economy—the US, also contributed 30 per cent of the 178 new projects, up from 134 last year. India and China accounted for nine per cent, with Australia at eight per cent, France seven per cent and Japan six per cent. More than a quarter of the businesses that located or expanded in London were in technology.