Osborne forced to make deeper cuts after another shocking month

The Treasury has told Whitehall departments to prepare for a fresh round of budget cuts this autumn, after new figures revealed Britain's public finances are rapidly deteriorating.

Government borrowing figures have exceeded the Chancellor's estimates for every month during the financial year so far. Treasury officials are now warning that if the trend continues, George Osborne could be forced to make deeper cuts to public spending to meet his target of eliminating the structural deficit by 2017.

Key targets are likely to be welfare spending – which accounts for the lion's share of the Government's outlay – and international-development which has so far escaped unscathed by cut backs. A Treasury source said: "The truth is what you see in the data is a pretty terrible four months which, for each one since April has been worse than expected. We'll have to see what happens over the next three months as we get more data. But obviously the Chancellor has the power to alter the spending allocations to take account of fiscal events."

The Office for National Statistics said yesterday that in July, the Government was required to find an extra £600m to plug the gap between spending and tax revenues, having registered a £2.8bn surplus in the same month in 2011. In the four months since Mr Osborne's Budget in March, the Government has now borrowed £9.3bn more than it did over the same period last year.

The Treasury source said much would depend on whether the independent Office for Budget Responsibility concludes that the borrowing overshoot can be offset in future years.

But with senior politicians increasingly pessimistic about avoiding a partial collapse in the eurozone, many in the Treasury believe that the OBR will revise up its borrowing forecasts in its next report.

In that case Mr Osborne would be forced to either raise taxes, cut public sector spending still further or abandon his borrowing targets.

A senior civil servant said: "The ideas being kicked around are the kind of unmentionable economies that would make your eyes water."

Public sector net debt now stands at above £1tn, compared to £940bn a year ago, and represents 65.7 per cent of the UK's GDP, up from 61.8 per cent last year.

The OBR said yesterday it was likely that its forecasts from March for growth in corporation tax receipts over the year would prove incorrect, but stressed it was still "too early" to judge whether its overall public borrowing prediction of £119bn for 2012-13 would turn out to be wrong.