Brown warned of need to lift taxes or cut spending

The Government will have to raise taxes again if it wants to meet its objectives on health, education, transport and poverty, leading experts warned yesterday.

Despite the massive tax and spending programme announced in the Budget, Whitehall could still find it runs out of money needed to hit key targets, they said.

However, any fresh tax hikes would be met with extreme anger from businesses, the head of the CBI said yesterday.

The warnings came ahead of the Gordon Brown's Mansion House speech tonight in which the Chancellor is expected to shed some light on the details of his three-year spending plan expected next month.

Whitehall departments are anxiously waiting to learn the size of their share in the multi-billion spending package announced in the April Budget.

But Andrew Dilnot, the head of the Institute of Fiscal Studies, said even Budget increases of up to £17bn a year might not be enough to turn around the UK's creaking public infrastructure.

"It will be very difficult to meet these objectives and while they may have allocated enough money it may still prove to be somewhat short," he said.

"If the Government wants to carry on increasing spending more than GDP it will have to increase taxes."

Mr Dilnot added the only alternative to higher public spending would be to boost the amount of private investment in these key public services.

"Either some areas of public spending would have to be cut – and it is difficult to see where – or taxes are raised or private spending is increased," he said. "There is no escaping this rather simple truth."

Speaking at the same conference, organised by the Society of Business Economists, a former economic adviser to the Treasury, Sir Alan Budd, said the Government could not borrow any more money without breaking its own fiscal rules. "There can be no more fiscal expansion by stealth," he said.

Meanwhile, Digby Jones, the director-general of the CBI, said mistrust of the Government in the business community was at its highest level for several years.

Mr Jones told the BBC: "I think there is a feeling among certain Labour politicians and some vested interests in the country that business is just there, and that money grows on trees and Government can take its share.

"Business is basically saying: 'Be careful, there won't be much more to come if you don't feed the cow as well as milk it'."

The Chancellor is also expected to focus on the UK economy after a fortnight of tumbling share prices.

Mr Brown is believed to be worried the UK economy might fail to hit his optimistic growth forecasts after preliminary estimates suggested it failed to record any growth over the six months to March.

The final estimate of growth in the first quarter is published on Friday but at best it is expected to show growth of 0.1 per cent, or an annual rate of 1.1 per cent. The revisions would need to be significant if the economy were to meet Mr Brown's 2.0-2.5 per cent target for 2002.

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