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.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
News
ebooksNow available in paperback
Life and Style
tech
News
The 67P/CG comet as seen from the Philae lander
scienceThe most important scientific breakthroughs of 2014
Arts and Entertainment
Ian McKellen as Gandalf in The Hobbit: The Battle Of The Five Armies
film
Arts and Entertainment
Sarah Koenig, creator of popular podcast Serial, which is to be broadcast by the BBC
tvReview: The secret to the programme's success is that it allows its audience to play detective
News
Ruby Wax has previously written about her mental health problems in her book Sane New World
people
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas