Brown urged to deliver a tax raising Budget

The Chancellor of the Exchequer, Gordon Brown, is today urged by a clutch of economic forecasters and City pundits to dampen buoyant consumer demand in the economy by delivering a tough, tax raising Budget.

Most City economists expect Mr Brown to increase the tax take in Wednesday's Budget, with estimates ranging from pounds 2bn to pounds 7bn on top of the pounds 5bn windfall tax on privatised utilities.

Likely targets include mortgage interest tax relief, which at present costs the Government about pounds 2.5bn a year, enhanced stamp duty on house purchases, tax credits on dividends, and increased National Insurance contributions for higher income earners.

But most experts think interest rates will also need to climb to prevent an inflationary boom. The Bank of England's Monetary Policy Committee at the end of next week could make the next move as early as its second meeting at the end of next week, following buoyant recent figures.

The consumer boom will be over by the middle of next year, after a "final blow-out" at Christmas, according to the Centre for Economic and Business Research. However, its chief economist Douglas McWilliams predicts that the economy as a whole will have a smoother ride, assuming taxes and interest rates go up.

A separate report from forecasting group Cambridge Econometrics says: "If the Budget is not tight enough, interest rates will have to rise further." This would keep the pound overvalued, damaging exports and industry, according to its latest forecasts.

Rival economists at Oxford Economic Forecasting agree. In their latest forecast published today, economist Adrian Cooper says: "Gordon Brown will present his first Budget against the background of a full-blown economic boom."

How much the Bank of England will need to increase interest rates will depend on the extent to which the Chancellor decides to increase the tax burden. Higher taxes could limit the necessary rise in the cost of borrowing to another half point, taking base rates to 7 per cent, the report suggests.

But in the only pre-Budget document to look beyond the short-term need to put the brakes on the boom, Patrick Foley, chief economist at Lloyds Bank, recommends avoiding fine-tuning taxes. Stable tax and spending plans would boost investment and long-term growth, he suggests. "The Government should focus on reducing uncertainty about economic prospects by directing fiscal policy towards stability in tax and spending and the avoidance of boom and bust," he says.

The Budget stakes were raised by figures at the end of last week which showed that the economy has expanded far faster than initial estimates suggested. Most economists now reckon there is very little spare capacity in the economy, meaning further growth will fuel inflation.

The Bank of England is therefore expected to raise interest rates again during the summer, perhaps as early as the end of next week. However, anticipation of base rate increases is driving the pound ever-higher. It climbed from just over DM2.86 to DM2.90 during the course of last week.

Many economists are therefore calling on the Chancellor to do some of the work necessary to cool the economy by increasing the tax burden.

Mr Foley disagrees. In the new Lloyds report he writes: "Demand management by fiscal policy is often ineffective and sometimes destabilising." The Budget ought to concentrate on long-term tax reforms to boost saving and investment, he argues.