Balkan Agreement: Price Of Conflict - War cost equal to 2p on income tax

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BRITISH TAXPAYERS could face a bill of about pounds 3.5bn for the war in Kosovo and the huge task of rebuilding the Balkans, it emerged last night.

The scale of the reconstruction package needed for Kosovo and the surrounding states is worrying ministers. One described the cost as "horrendous".

Early estimates in Whitehall suggest that the Kosovo crisis will cost Britain pounds 3.5bn over the next five years - almost enough to cut 2p off the basic rate of income tax.

Although the Treasury insists it is too early to work out the final bill, Gordon Brown, the Chancellor, has privately acknowledged that he will have to dip into the Government's pounds 1.2bn reserve kitty because departments will not be able to absorb the huge extra costs.

The Ministry of Defence believes that military operations conducted so far have cost between pounds 400m and pounds 500m. Officials believe Britain's contribution to the peace-keeping force in Kosovo will cost another pounds 200m a year.

The biggest bills will stem from the efforts to rebuild the Balkan states. The European Commission has estimated that about pounds 3.3bn a year may be needed for five years - a total of pounds 16. 5bn.

Officials expect Britain to be asked to meet at least 10 per cent of the cost - the burden it shouldered when a reconstruction plan was drawn up for Bosnia. This would amount to pounds 1.65bn. Other unforeseen costs could take Britain's final bill to pounds 3.5bn.

The strain of paying the Kosovo costs from the contingency fund will make it harder for departmental ministers to win top-up funds for unforeseen emergencies from Alan Milburn, the Chief Secretary to the Treasury.

This could put pressure on the health and education budgets, even though they have already won a pounds 40bn injection over the next three years.

The Government will argue that Britain's leading role in the peace-keeping operation, to which it is contributing 13,000 troops, should allow it to put in proportionately less towards the reconstruction fund.

"We are not trying to wriggle out of obligations and we will play our part," a Whitehall source said last night. "But we will make sure full account is taken of our military role inside Kosovo."

Robin Cook, the Foreign Secretary, said yesterday: "It is of course going to cost money to put Kosovo together again. It is of course going to cost money to make sure that we can really regenerate the economies of the region."

He insisted: "The price of doing that is actually less than the long- term price of not doing it. We want to bring stability to this region, which has been such a source of insecurity to Europe over this century."

A dispute has broken out between the Treasury and the Ministry of Defence over who should foot the bill for the air campaign in Kosovo and Yugoslavia. The MoD is bidding for extra funds but the Treasury wants to scale back the amount on the grounds that some of the cash would have been spent in other areas, such as training, if the Kosovo crisis had not happened.

Ministers expect a compromise to be reached. "We will be sympathetic but we will also protect the taxpayers' interest," said a Treasury source.