Government needs £5bn each year in tax hikes: think-tank

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The Independent Online

The Chancellor, Gordon Brown, was handed last-minute ammunition for the tax rises he is expected to unveil in tomorrow's Budget from research showing they should rise by £5bn to bring the public finances into long-term balance.

The National Institute for Economic and Social Research, a respected think-tank, warned a more "severe adjustment" of £18bn would be needed if the Government was committed to long-term hikes in benefits and public spending.

The research, by Professor James Sefton of Imperial College London, aimed to establish whether the Government's spending plans balance over the long-term – known as generational accounting.

This calculates whether all the commitments made by ministers now could be afforded without hiking the tax burden on the next generation.

His research showed that based on the commitments on public spending and benefits, taxes would have to rise £5bn a year in perpetuity – equivalent to 1.5p on the basic rate of income tax.

And he said that if the new incomes-based tax credits Mr Brown has introduced – for working families, children and pensioners – were linked to wages rather than inflation this would cost £18bn, or 7p on income tax.

However, the headline £5bn was actually lower than the £6bn conclusion of a similar study carried out in 1998. Professor Sefton said this was because consistently higher-than-expected tax revenues had more than offset the extra commitments.

In contrast, Professor Sefton said the Chancellor did not need to raise new taxes to fund extra spending on the NHS. "I think he is very cautious as this increase in spending on the NHS to get it up to European levels has already been built in," he said.

He said taxes should rise to pay for the cost the next generation faces from benefit and spending commitments rather than for today's extra money.

Labour has been keen to link tax increases to public service improvements rather than to higher benefit payments.