CONSERVATIVE Party hopes of a pre-election tax-cutting Budget in November, months ahead of the last date for the General Election, have been dealt a severe blow by the Government's latest economic forecasts.

These showed that the Government is to borrow billions more in the period to March 1998 as expected reductions in the Public Sector Borrowing Requirement prove elusive.

The Chancellor of the Exchequer, Kenneth Clarke, also confirmed that the economy will grow more slowly this year than he had forecast in his Budget in November, but he expects activity to pick up sharply next year.

Most of the changes announced in the Treasury's summer forecasts had been widely anticipated in the City. The biggest surprise was the large upward revision to the 1997-98 PSBR from #15bn to #23.1bn. This would bring borrowing into line with the Maastricht guideline of 3% of gross domestic product two years behind schedule.

Mr Clarke is now forecasting that GDP will grow by 2.5% this year, half a per cent less than he projected in his Budget. He has stuck to his forecast of 3.25% growth next year.

Consumers' expenditure is likely to be a major expansionary force this year and next. The Treasury is now forecasting an increase of 3.25% this year rising to 4.25% next year.

The Treasury said: ``Disposable income and wealth are being boosted by tax cuts, lower mortgage rates, buoyant share prices, rising house prices, and windfalls from building society mergers and flotations and electricity rebates.'' Maturing Tessas would also add to households' liquidity.

Even the reduced forecast for growth this year is likely to prove demanding. Mr Clarke is more optimistic than the consensus in the City of 2.25% and much more optimistic than his own panel of independent forecasters who are predicting just 2%.

If the 2.5% forecast is to be validated, a marked acceleration in activity will be needed for the rest of the year, assisted perhaps by further reductions in interest rates.

An easier monetary policy could be justified by the improving inflation outlook. The Treasury confirmed that it expected underlying inflation, now 2.8%, to fall to the Government's target of 2.5% by the end of this year. It believes inflation will decline to 2.25% by the end of the first half of next year and remain there until the end of that year.

This year's PSBR has been revised up from #22.4bn to #26.9bn, following last year's #32.2bn, an overshoot of more than #3000m on the Budget forecast.

Shortfalls in tax revenues have been the main factor behind regular upward revisions to official PSBR forecasts. This has been partly the result of growth turning out to be less than the Treasury expected. A difference of 0.5% adds #3000m to the PSBR.

But slower growth does not explain away all of the shortfalls. The Treasury has been overstating the yield from value-added tax and has no clear reason why this should be so.

``So the failure of VAT receipts even to keep pace with spending over the past three years is surprising,'' it said.

But the latest forecasts for the PSBR assume ``only a modest rise'' in VAT relative to consumer spending.

Adam Cole, UK economist at HSBC James Capel, said: ``The main news in the Treasury's summer forecast is the significant deterioration in the longer term outlook for the PSBR.''

The upwards revision to this year's borrowing requirement was as expected, but the #8000m deterioration in the public finances next year went beyond the expectations of all but the gloomiest foreasters, he added.

``We strongly suspect that having been disappointed on tax receipts in recent years, the Chancellor is now being over-cautious.

``By the November Budget the Chancellor could well be looking at revising the PSBR forecasts down - a perfect background for a further tranche of tax cuts.''

The Treasury is also forecasting current account deficits of #3500m this year and #1500m next. The latest figures from the Office for National Statistics put last year's deficit at #2900m.