Public finances deteriorate sharply

By Sumeet Desai and Matt Falloon

LONDON (Reuters) - The budget deficit swelled to its largest in at least 60 years in the six months to September, and analysts say the government coffers look set to deteriorate further as the economy slows.

Chancellor Alistair Darling's forecast for a full-year deficit of 43 billion pounds now looks very optimistic, but he has said borrowing will need to rise to boost the economy, which is nearing its first recession since the early 1990s.

The Office for National Statistics said on Monday that public sector net debt for April to September stood at 37.59 billion pounds versus 21.46 billion in the same period a year ago -- the highest half year total since records began in 1946.

"The speed with which the political debate already is turning to fiscal loosening raises risks that the loosening in the recession and pre-election period will be so big that the fiscal deficit itself will become a destabilising factor for the economy in coming years," said Michael Saunders, an economist at Citigroup.

The Labour Party, which must call an election by May 2010, is behind in opinion polls after 11 years in power but Prime Minister Gordon Brown's popularity has jumped because of his handling of the financial crisis.

However, analysts say any prolonged recession could have serious repercussions for Brown.

DEBT LIMIT

Given the desire for a fiscal stimulus, speculation has grown that Labour could relax its self-imposed limit on borrowing and also bring forward some of its spending plans as soon as a pre-budget report due in coming weeks.