Finances `mess' to drive up tax

A senior government adviser has warned that the public finances are in such as mess that taxes are likely to go up whichever party wins the general election.

That gloomy assessment comes despite expectations that the Government will receive a pre-Christmas boost to its electoral chances from a raft of favourable economic news this week.

Figures due in the next few days could show the number of unemployment benefit claimants dropping below 2 million for the first time in nearly six years, along with firm growth in high street spending and further signs of improvement in the housing market.

The Government is also likely to get a pat on the back for its policies from the Organisation for Economic Co-operation and Development in its half-year economic outlook at the end of the week, although the report is expected to sound a note of caution about the dangers of over-heating.

The one cloud will be tomorrow's figures for government borrowing last month, with a prominent City economist warning in a new paper today that taxes will have to rise next year whoever wins the election.

Bill Martin, an adviser to the Treasury Select Committee at the House of Commons and an economist at investment bank UBS, warns that the public finances are in such a mess that taxes are likely to go up whatever the outcome of the election.

He calculates that the underlying gap between public spending and tax revenues - that is, adjusting for the stage of the business cycle - is so high that the next government will face an unpalatable choice if it is to avoid a damaging level of interest rates and exchange rate. There will have to be further expenditure cuts or tax increases.

Mr Martin says the Treasury's forecasts that the public sector borrowing requirement (PSBR) is on a downward path make rosy assumptions about both the growth in tax revenues and expenditure control. He notes that the Treasury is assuming the trend decline in VAT receipts relative to the size of consumer spending will come to an end.

The Chancellor, Kenneth Clarke, also insists that his success in delivering tight spending control since 1993 means the Government can meet its current targets. However, Mr Martin points out that keeping the lid on spending growth is easy when the economy is recovering, as it has been since 1993, but will become much harder when it next turns down.

The damage done by excess government borrowing in terms of putting upward pressure on interest rates will be compounded if the private sector begins to save less. Higher house prices, making people feel wealthier, tend to reduce the savings rate.

City economists expect that November's PSBR will show a shortfall of about pounds 2.7bn, following the surprisingly big monthly surplus of pounds 4.4bn in October.

Worries about the PSBR contrast with news on both the housing market and high street spending expected this week. The latest research from Rob Thomas, a housing analyst at Swiss investment bank UBS, forecasts a 10 per cent rise in 1997 followed by a further 10 per cent gain in 1998. It will be the first sustained period of house price inflation since the market crashed in 1989.

London and the South-east are expected to see even higher price rises, reaching up to 15 per cent before tailing off in 1998. Growth in Scotland, Wales and the north of England is expected to average between 6 and 8 per cent next year.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
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

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living