'Euro entry could cost taxpayers £10bn'

The Chancellor, Gordon Brown, must hike taxes by £20bn ­ equivalent to 6p on income tax ­ to pay for entry into the euro and fill a black hole in his coffers, two separate reports warn today.

The hikes would be a triple whammy for households and businesses that are already braced for April's £8bn hike in national insurance payments.

In a study on the costs of UK membership of the euro currency, economists at Goldman Sachs, the investment bank, warn taxes would have to rise to offset the huge boost to the economy from a fall in the pound.

They said the pound would have to drop by 7.5 per cent against the euro to 73p for the UK to be able to live within the single currency.

This would trigger a boost for exporters and higher prices for imported goods ­ inflationary factors that would normally require hikes in interest rates.

But with rates likely to fall as much as 1 percentage point to fall in line with eurozone rates Goldman warned that the pressure would fall on fiscal policy.

"Policy would be need to tightened by enough to offset the expansionary effects of a lower real exchange rate," said economists David Walton and Ben Broadbent.

It said that unless the economy slowed of its own accord the Government would "eventually" have to hike taxes by or cut spending by 1 per cent of GDP ­ some £10bn.

"Given the Government's declared objectives for improving public services, a fiscal tightening of this magnitude implies an increase in taxes as the transitional cost for joining [the euro]."

Their remarks are relevant in the light of the Government's announcement it had commissioned a study into the transitional costs as part of its analysis of the five economic tests fore joining the euro.

The Treasury declined to comment, but supporters of UK membership attacked the report. Philippe Legrain, the chief economist at Britain in Europe, said: "It is simply incorrect to say that there is a price for joining for the euro and that that is higher taxes".

But the No Campaign, an anti-euro group, said the report showed the Government could not consider joining the euro until the current imbalances in the UK economy had unravelled.

Meanwhile PricewaterhouseCoopers said slower economic growth and lower tax revenues would plunge the public finances further into the red than the Chancellor had forecast.

It said taxes would have to rise by £10bn over the medium term if the Government wished to carry on increasing public spending beyond 2005.