Central government spending on running costs such as salaries rose by 10% in the first five months of the year to £165bn, compared with a budgeted increase of just 6.5%.

The CBI expects public borrowing to react £32.5bn by 2004/2005 some £8bn more than the Treasury forecast at the time of the last Budget.

CBI head of economic analysis, Doug Godden, said: 'The government has boxed itself in by committing to such large increases in public spending. There is growing concern in the business community that the chancellor will have to take unpalatable action at some point in future.'

He added: 'Economic growth has been more sluggish than originally hoped and the public finances are in increasingly poor shape. Over the short-term we should be able to get through by allowing borrowing to rise but that cannot go on forever.'

Godden predicted more tax rises or less public spending than planned unless there is a an unexpected improvement in the financial situation over the next three years.