Chancellor 'needs £2.5bn extra tax'

Brown's decision to extend economic cycle fails to eliminate £11bn shortfall, says think-tank

Households face a £2.5bn tax increase - equivalent to a penny on income tax - if Gordon Brown wants to meet his "golden rule" on the public finances, an independent think-tank said yesterday.

The Institute for Fiscal Studies warned the tax bill would be billions of pounds higher if the Government's plan to curb the growth in public spending over the next five years went awry. It said if the Treasury gave into political pressure for higher spending and failed to control Whitehall waste it would have to find an extra £15bn.

The think-tank said Mr Brown's controversial decision to extend the timing of the economic cycle, his £2bn tax raid on North Sea and cuts to his spending plans had failed to eliminate the £11bn shortfall the IFS identified a year ago.

"The Chancellor will need to raise taxes by about £2.5bn to get the public finances back on to the path he was hoping for in last year's Budget, even if he carries out the £8.5bn of spending cuts he has tentatively pencilled in," the report said.

The Chancellor set a "golden rule" when Labour won power in 1997 that he must borrow only to invest averaged over an economic cycle. In other words, day-to-day spending must be paid for from taxes.

The IFS said the Treasury would break the rule by £700m, even after extending the cycle by five years, so it runs from 1997 to 2009, but admitted the margin was "economically insignificant".

The IFS said its analysis showed the plans for public spending from 2007 to 2011 would be the toughest out-turn since the early years of the Labour administration when Mr Brown adhered to Conservative spending plans.

Of the 1.8 per cent real growth in spending, the IFS said it was fair to assume the NHS would receive the 4.4 per cent recommended by the Wanless review, while education would rise in line with economic growth. It said after factoring in a budgeted 10.5 per cent rise in world aid and a 2.2 per cent rise in social security spending, it left other departments with a 0.2 per cent fall in spending after taking inflation into account. If the Government were to push ahead with keeping all spending in line with growth, the Chancellor would have to impose another £15bn of tax rises, it said.

The IFS also published forecasts from Morgan Stanley showing poor productivity and low investment threatened to undermine the Treasury's growth forecasts. "This is a double blow for a Chancellor whose record at the Treasury is starting to look increasingly ragged," the shadow Chancellor George Osborne said. "Gordon Brown borrowed in a boom and now finds himself under pressure to raise taxes in a slowdown and cut spending. This is bad fiscal management which even the Chancellor's manipulation of the fiscal rules can't hide."

The Treasury said the Budget forecasts showed it would meet its "golden rule".

FSA paints bleak picture

The Financial Services Authority warned yesterday consumers and firms face more risks in 2006 than last year, given the threat of terror attacks, rising demand for new products in derivatives markets and the growth in financial fraud through the internet.

In its report on the key risks it is monitoring, the regulator called on companies to continually reassess their ability to deal with risks they face and with possible financial shocks. It listed these as natural disasters, possibly driven by climate change, global pandemic, political instability in a major economy or a major corporate bankruptcy. "It is easy to identify an increasing number of severe risks which, although of low probability, would have high impact if they were to materialise," the FSA chairman, Sir Callum McCarthy, said.

Although the short-term economic outlook was likely to remain benign, the FSA said this was clouded by uncertainties such as the future path of oil prices.

London and other financial centres were "high-profile targets for terrorist attacks", it added.