WEAK tax revenues and unexpectedly big bills for debt interest and social security payments have blown a hole in the British government's finances, forcing Mr Kenneth Clarke, the Chancellor of the Exchequer, to raise his forecast for public borrowing next year by £8 billion sterling.

Mr Clarke insisted yesterday that he would cut taxes "every time there's a chance of doing so". But the outlook for government borrowing depicted in his summer forecast will severely limit his room for manoeuvre in November's pre-election budget. Some Treasury officials are telling him to raise taxes, not cut them.

Defending his predictions, the Chancellor also launched a surprise attack on the Bank of England arguing that, throughout his time as Chancellor, its forecasts for inflation had "always been wrong and always been too pessimistic". Speculation that Mr Clarke might soon push interest rates down again gained ground in the financial futures market.

The Chancellor now believes that the government will need to borrow £23.1 billion in 1997/98 to meet the shortfall between its revenue and spending. This is £7.8 billion more than he predicted in last November's budget, an upward revision of more than 50 per cent.

The forecast for this year's public sector borrowing requirement has been raised from £22.4 billion to £26.9 billion, in line with the forecasts of independent economists. The government continues to break the, so-called "golden rule" under which it should only borrow to pay for investment.

The treasury also, in effect, conceded that the government might not be on course to achieve the budget deficit of 3 per cent or less of gross domestic product in 1997 which is set by the Maastricht treaty as a target for participation in a single European currency. Mr Clarke said it was "quite a close call".

Alongside the upward revision to estimates of government borrowing, the Chancellor also ditched his long-ridiculed Budget forecast of 3 per cent growth this year. He now expects the economy to grow by 2.5 per cent.