Railtrack collapse 'will put up taxes'

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The Chancellor of the Exchequer, Gordon Brown, will likely have to increase taxes due to the military action in Afghanistan and in the wake of the collapse of Railtrack, states a report out today from an influential economic think tank.

The Centre for Economics and Business research said that the military conflict in the war against terrorism will put pressure on the Government to raise defence spending, with the defence budget set to rise in 2003-2004 by about £2.1bn to £27bn, or 2.5 per cent of gross domestic product. Under current plans, defence spending would fall to 2.3 per cent of GDP.

The direct cost of British participation in the conflict is likely to be less than half of the £3bn cost of its role in the Gulf war, the centre said.

At the same time, the collapse of Railtrack has jeopardised the Government's plans to obtain about £9bn from private companies through the Private Finance Initiatives.

The Chancellor is likely to raise National Insurance contributions in spring 2002 and close corporate tax loopholes, the think tank said.

According to OECD figures, the UK tax burden was 41.1 per cent of GDP last year, above the international average of 38.2 per cent and below the European Union average of 44.2 per cent. "We could be projecting a UK tax burden as high as the EU average and well above the international average in five years," the centre added.

"Although UK tax yields are high, the marginal rates, which affect incentives, are lower than in many countries. But the UK government is bad at spending money, achieving very low levels of service provision in relation to the sums spent," it added.