Brown needs to raise taxes by £10bn, says IFS

Taxes must rise by £10bn a year to prevent Gordon Brown breaking his "golden rule" to keep the public finances in balance, a leading think-tank said yesterday. The Institute of Fiscal Studies said that if he wanted to meet the rule with the margin for error he has kept in the past, the figure could as high as £13bn - equivalent to 4p on the basic rate of income tax.

"That would be prudence with a purpose," said Robert Chote, the institute's director, in a reference to the Chancellor's catchphrase.

The forecast came as the European Commission warned that Mr Brown risked breaching EU rules - a complaint likely to be echoed tomorrow by the National Institute for Economic and Social Research. The three reports will add to speculation that the Chancellor must raise taxes or cut spending to bring a burgeoning budget deficit under control.

The IFS said it believed the Treasury would have to borrow even more than it forecast in last month's pre-Budget report because revenues would come in lower and spending higher than it projected.

Mr Brown's golden rule dictates that public finances must be in surplus when averaged out over the economic cycle. The IFS said it was "touch and go" whether the rule would be broken during the current cycle without raising taxes or cutting spending. It said the next cycle, beginning in 2006, would start with a deficit. It forecast deficits of £38bn in both 2006-07 and 2007-08 rather than the £27bn forecast in the PBR - a total shortfall of £22bn.

Mr Chote admitted that even if the Chancellor delayed raising tax rises for a couple of years there would not be a "crisis in the public finances". But he added: "He would be well advised to act promptly to safeguard the credibility of his fiscal rules."

The IFS offered several "least-unattractive" scenarios for the Chancellor to put up taxes, including freezing the income tax personal allowance and the earnings threshold for national insurance, as well as taxing housing more heavily.

Meanwhile the European Commission criticised Mr Brown for forecasting a budget deficit of 3.4 per cent of GDP in the current fiscal year. It said if it turned out more than 3 per cent in the calendar year - putting the UK in breach of the Maastricht treaty - there would be "grounds to note an excessive deficit".