An alarming drop in tax revenues has blown a hole in the public finances, making it virtually impossible for the Chancellor, Alistair Darling, to hit the annual borrowing target he set out less than three months ago.

The steep fall in tax receipts in the crucial month of January pushed the budget deficit so far this year to a record high, even before a potential extra debt burden of £1.5 trillion caused by bank bailouts.

Public sector net borrowing was £67.2bn between last April and January, Office of National Statistics (ONS) figures showed yesterday – its highest level on record.

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The budget surplus shrank to £3.3bn from £13.9bn a year earlier in January, the month when the Government collects more than 10 per cent of annual tax revenues.

January's figures are the most important for measuring the state of the public finances because they include self-assessment of income tax, financial sector profits and January bonuses paid to bankers. The fall in revenues was partly down to the slashing of City bonuses, with most banks cutting annual payouts by about 50 per cent for 2008. The figures show how the Government, despite its attacks on banks and their lavish bonuses, has relied on the City for large chunks of its income. They also illustrate the Government's dilemma: by pandering to public opinion by clamping down on City bonuses, the public finances will suffer. Howard Archer, UK economist at IHS Global Insight, said: "The public finances for January are terrible, coming in even worse than feared. The alarmingly high Government deficit projections contained in November's pre-Budget report are in fact significantly too low and will have to be revised up by Mr Darling in April's budget."

Total tax receipts for January fell to £53.8bn from £60.5bn a year earlier. Company tax income dropped by 24 per cent, income tax was down 4.3 per cent and national insurance fell 2.9 per cent. At the same time, spending surged 6.7 per cent as rising unemployment drove a 15 per cent jump in net spending on benefits.

For the first eight months of the financial year, tax receipts fell £10bn, far outstripping the Chancellor's forecast of a £2bn slide for the whole year. The Institute for Fiscal Studies said the shortfall sees the Government heading for an £87bn deficit for the fiscal year, £9bn more than Mr Darling forecast in November.

Public sector net debt was £703bn in January, or 47.8 per cent of gross domestic product and its highest level since the dark days of the late 1970s after Britain was forced to ask the International Monetary Fund for support.

The ONS said Royal Bank of Scotland and Lloyds Banking Group, bailed out to the tune of £37bn in October, could add as much as £1.5trn, the equivalent of 100 per cent of GDP, to the official debt burden because they will be classified as public-sector companies. Economists say, however, that the figure vastly exaggerates the risk of absorbing the banks.

Kenneth Clarke, the shadow Business Secretary, condemned the borrowing figures as "staggering" and called on the Chancellor to cut public spending growth.

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Mr Clarke told the BBC: "This is a problem now, it's a problem paying interest on it, it is going to be difficult to sell gilts to finance it... and it's eventually going to slow down the recovery. It is necessary to start setting out some medium- and long-term proposals to show how you are going to get back to normality and some sustainable levels of debt."

The worsening public finances have marked out clear ground between the Labour Government and the Conservatives – who accuse Mr Darling of burdening the country with debt for a generation. Angela Eagle, the Treasury minister, said: "What would be a disaster would be to cut public expenditure now."

Markets predicting the future price of government bonds, or gilts, fell after the figures' publication, on fears the Government will have to issue more debt to make up for the shortfall. But a sale of 2012 gilts after the data came out met heavy demand, indicating appetite for government debt remains.

Brown invites Pope to UK

Gordon Brown has invited Pope Benedict to make his first official visit to Britain after the two men held talks at the Vatican. The Prime Minister confirmed that he had made the offer during a private audience. He said the Pope "was very welcoming of the invitation", although no date had been set. It would be the first papal visit since John Paul II came to the UK in 1982. Mr Brown said he suggested to the Pope that a visit could coincide with the beatification of Cardinal Newman, one of the most prominent members of the Church of England to convert to Catholicism. No date has been set for the beatification but it was expected to take place either later this year or next. Last month, Cardinal Jose Saraiva Martins, prefect of the Congregation for the Cause of the Saints, announced that the beatification of Cardinal Newman was "imminent". The Vatican said Mr Brown and the Pope had "cordial" talks.

Ben Russell