By Fiona Shaikh and David Milliken
LONDON (Reuters) - Public finances deteriorated almost twice as fast as expected last month, raising the risk the government will have to raise its borrowing forecasts when it unveils its pre-budget report next month.
Official data showed public sector net borrowing jumped to 11.419 billion pounds last month -- the highest on record for an October -- and leaving borrowing in the fiscal year to date almost three times higher than a year ago.
But the Treasury stood by its forecast for borrowing to hit 175 billion pounds this year, and said revenues would start improving once growth resumes around the turn of the year and an emergency cut in sales tax is reversed. It will publish updated borrowing forecasts on December 9.
Gilt prices fell sharply, driving yields up by as much as 7 basis points as investors fretted that bond issuance, already earmarked at a record 220 billion pounds, would rise further.
The government faces mounting pressure to spell out how it will curb public borrowing as it prepares to fight an election due by June 2010, and amid worries that record debt levels will threaten the country's triple-A sovereign debt rating.
"It now seems certain that the Chancellor (Alistair Darling) will miss his 2009/10 PNSB target of 175 billion pounds by some distance," said Howard Archer, economist at IHS Global Insight.
"Indeed, a PSNB around 200 billion pounds for 2009/10 now looks a very real possibility."
October is usually a surplus month for the public finances due to corporation tax receipts, but Thursday's data showed these had plunged by almost a third compared with last year due to the recession.
Still, some analysts noted that part of the deterioration may have been due to the temporary reduction in value-added tax, which will be reversed at the start of next year.
"We must remember that the VAT rate will go up from January and at a time when retail sales and consumer spending appear to have bottomed out (so) the deficit may not look as bad going forward," said Amit Kara, economist at UBS. "That said, we're likely to get slippage from the government's forecast."
SALES UPTURN
Separate figures showed retail sales rose as expected last month, providing some positive news about the state of consumer demand, with sales up 0.4 percent last month after an upwardly revised 0.4 percent gain in September.
The ONS said October's increase was driven by clothing and footwear sales, helped by good weather in the school holidays which encouraged shoppers to go out and spend.
Non-store sales, which includes internet shopping, rose by 1.7 percent last month and by 15.8 percent on the year -- the biggest annual rise since last December. The ONS said postal strikes may have encouraged people to order early for Christmas.
Department store chain John Lewis has enjoyed a rebound in sales in recent weeks and on Thursday said sales rose 15 percent in the week to November 18 compared with a year ago.
"High street spending is still holding up reasonably strongly in the face of some pretty adverse conditions," said Jonathan Loynes of Capital Economics. "With household debt still very high, unemployment set to rise a lot further and a fiscal squeeze looming, the outlook for consumers is hardly rosy."
Indeed, a separate survey from the Bank of England showed lending remains constrained, particularly for companies.
The central bank said the flow of lending to businesses contracted for an eighth consecutive month in September as firms continued to use funds raised on capital markets to pay down bank debt.
But its "Trends in Lending" report also showed mortgage approvals for house purchase rose to 61,000 in October from 56,000 in September.
(Additional reporting by Christina Fincher, Keith Weir and Sumeet Desai)
(Editing by Ron Askew)
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