A "dreadful" set of figures showing government borrowing running at record levels has called into question Alistair Darling's ability to spend his way out of the looming recession.

As the Tories attacked the Chancellor's plans to pour billions into public works in a Keynesian attempt to prime the pump during a downturn, the Office of National Statistics (ONS) announced ballooning government debt that economists said would leave his hands tied.

The ONS said that Public Sector Net Borrowing (PSNB) reached £37.59 billion from April to September, the first half of the financial year. That was more than the whole of last year and the highest half-year total ever recorded.

It also makes a mockery of Mr Darling's full-year PSNB forecast of £43 billion. The City now expects borrowing to total around £65 billion and analysts say it is unfortunate that the deficit is spiralling upwards even before recession has hit.

"The September public finances were dreadful," said Howard Archer, an economist at Global Insight. "This highlights the extremely poor state of the public finances as they are hit by past largesse, the marked economic slowdown, markedly weak housing market activity and prices, rising unemployment and government policy concessions since the March budget."

In a newspaper interview at the weekend, Mr Darling made clear that he planned to raid future budgets to fast-track major construction projects to stimulate spending. He conceded that the strategy owed much to the economist John Maynard Keynes's response to the Great Depression of the 1930s.

"Much of what Keynes wrote still make sense," Mr Darling told The Sunday Telegraph. "You will see us switching our spending priorities to areas that make a difference — housing and energy are classic cases where people are feeling squeezed."

But David Cameron, the Conservative leader, responded today by saying that an inflationary spending "splurge" would only put at risk the interest rate cuts needed to bring the economy back into the black. Instead, the Tories want targeted measures, such as a VAT holiday and National Insurance reductions for small firms.

"In politics you only have a certain amount of time and capital to expend — spend it on the things that will make a difference," he told BBC Radio 4's Today programme.

Emboldened by the worldwide praise for the UK's bank rescue plan, Mr Brown has displayed more of a willingness in recent weeks to take the fight to the Tories. The idea of ramping up official spending during a recession has a clear, if unspoken, political benefit in that it would leave Conservative spending plans in disarray before the next election.

Mr Cameron said: "If you have a big deficit, as we do, if you then go on a further splurge and make it larger, everybody knows that means taxes are going to go up in the future so they behave accordingly, and also the Bank of England will be more reluctant to reduce interest rates.

"And if we are actually looking at what puts money back in people’s pockets, it is actually those interest rate reductions that feed through into lower mortgage payments and that’s what people desperately want. If the Government behaves stupidly they won’t get them."

Mr Cameron will hold a summit with small business leaders in the House of Commons today to discuss his proposals, which also include calling on local authorities to pay small businesses for their services within 20 days, rather than 30.

Under the Tory proposals businesses with fewer than five employees would have the rate of employers’ National Insurance that they pay cut by 1p for at least six months. The party said that a firm with four workers and an annual wage bill of £150,000 would save more than £100 a month or the equivalent of a 15 per cent interest on an £8,000 overdraft.

It would be paid for, alongside a cut in corporation tax rates for small firms to 20p, by abolishing reliefs and allowances introduced by Labour.

The Tories calculated the cost of the National Insurance change to be around £225 million over six months.

Mr Cameron said that firms of up to 250 employees would benefit from the six-month VAT bill delay. He said that it was "not entirely clear" whether the Government was intending to increase public spending or simply bring forward projects.

According to the latest ONS figures, the economy registered zero growth in the first quarter of the year. But a respected forecasting group said today that it was already in recession, for the first time since 1992, and would shrink next year.

The Ernst & Young ITEM Club, which uses the Treasury’s economic forecasting model, said that the credit crunch will hit the UK "very hard" even if recent bank rescues restore calm to the financial system.

House prices will be 14 per cent below their 2007 peak by the end of the year and tumble a further 10 per cent in 2009 before stabilising in 2010, it added.

The ITEM club forecasts that the economy will shrink for three further quarters before bottoming out in the second half of next year, and is looking for a weak recovery in 2010.

The group's chief economist, Peter Spencer, said: "We now have to face up to the reality of an economy that has been seriously weakened by recent dramatic events. The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy."

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