Golden rules are made to be broken as Brown faces deficit

Gordon Brown will breach his "golden rule" on government debt next year and maybe even break it this year unless he raises taxes.

Gordon Brown will breach his "golden rule" on government debt next year and maybe even break it this year unless he raises taxes.

In a report to be released tomorrow, the Ernst & Young Item Club, which uses the Treasury's own model, will point out that the low tax take from businesses and individuals is causing the Chancellor a headache. Only a week after his comprehensive spending review, the report will show his calculations could be way off the mark.

According to the "golden rule" which Mr Brown instituted when he came into office in 1997, the current account should not be in deficit over the life of an economic cycle. The existing cycle is defined as starting in 1999 and on that basis the current account was £18bn in surplus at the beginning of this financial year.

The Item club is predicting that Mr Brown will have a current account deficit of £13bn this year, leaving him just £5bn of headroom in 2005-06.

Professor Peter Spencer, economic adviser to the Item Club, says it is a racing certainty the "golden rule" will be broken in 2005-06. "If things do not go his way, he could breach it this year."

Figures to be released on Tuesday will give a better idea but Professor Spencer says they are unlikely to show any good news.

Mr Brown's problems are due to a lower-than-expected take for corporation and income tax. A clue to why this is so low came on Friday, when the Office for National Statistics showed that payments into pension schemes had risen by a quarter since last year. This increase has come because of worries about the massive pension fund deficits run up at many UK companies. As these payments are tax exempt, this will hit the Treasury's income.

Stephen Yeo, a senior consultant at actuary Watson Wyatt, said: "Extra pension contributions are being paid by employers. If company contributions rise by £10bn in a year, the lost revenue to the Exchequer is roughly equal to an extra penny on the rate of income tax for everyone."