IMF warns of crisis unless taxes rise

Labour's bid to put the economy at the heart of its election campaign suffered a severe setback yesterday after the world's leading financial watchdog warned the Government would have to impose £12bn tax hikes to prevent a crisis in the public finances without swingeing spending cuts.

Labour's bid to put the economy at the heart of its election campaign suffered a severe setback yesterday after the world's leading financial watchdog warned the Government would have to impose £12bn tax hikes to prevent a crisis in the public finances without swingeing spending cuts.

In a report that was seized on by opposition parties, the International Monetary Fund (IMF) urged the UK to speed up its "fiscal consolidation" over the coming parliament ­ code for cuts in public spending, tax increases or new charges for public services.

In its first assessment since last month's Budget, the IMF said: "Steps are needed to accelerate the pace of fiscal consolidation, which is very modest in the recent Budget, to meet the Government's budgetary objectives over the course of the next economic cycle."

The IMF's deputy chief economist, David Robinson, said he was concerned the Government would break its golden rule ­ to borrow only to invest averaged over the economic cycle ­ over the next cycle that begins next year. "Our concern is that in the current stance of policy it would be difficult to meet their own fiscal rules over the course of the next economic cycle ... The amount we are looking at is perhaps of the order of 1 per cent of GDP over five years," he said. "In terms of how that would be achieved the preference would be to have slower expenditure growth. That would ensure the rules were met. If not [spending cuts] one would need to look at the revenue side."

The Conservatives said it was a "timely reminder" that the Government's spending plans meant there would be increases in tax after the election. Oliver Letwin, the shadow Chancellor, said: "He [Gordon Brown] has ruled out raising income tax ... So why doesn't he come clean and say which tax it will be?"

The report gave little help to the Tories or Liberal Democrats as the £12bn of fiscal tightening ­ equivalent to 3.5p on the basic rate of income tax ­ is greater than either party is proposing. Asked whether the IMF was disappointed no political party was offering tough measures to reform the public finances to voters, Mr Robinson said: "I think this is an issue which is going to face whatever political party wins in May."

The IMF ignored criticism of its assessment in September, when Mr Brown branded the IMF's assessment as wrong and urged it to revise the calculations.

A spokesman for the Labour Party said: "The Treasury has consistently disagreed with the IMF about fiscal forecasts ... The Budget showed we will meet the fiscal rules. It is worth noting that these latest forecasts from the IMF do not appear to take into account the latest strong data on the public finances. It is right for Britain that we reject any proposals to cut investment or to tear up the successful fiscal rules we have maintained since 1997 ... and move to the sort of balanced budget regime the IMF would prefer."

The fund reserved its sharpest criticism for the eurozone, Japan and the US, which it said had failed to tackle its spiralling current account deficit.