Think-tank says Brown has fudged his golden rule

Gordon Brown's golden rule that he must balance the public finances is no more than "gilded lead", one of the country's leading think-tanks said today.

The National Institute for Economic and Social Research accused the Chancellor of "fudging" the way the test was analysed now that he was close to breaking it. It warned that companies could be hit with a £1.5bn leap in the local business tax to help fill a £16bn black hole in the Treasury's coffers.

The NIESR said the Government would end the economic cycle with a current budget deficit - excluding investment spending - of £10bn compared with a Treasury forecast of a £14bn surplus. It said the Treasury appeared to be interpreting the rule as to a share of GDP, which delivered a higher number as the economy grew.

Martin Weale, its director, said: "This is not so much a golden rule as gilded lead. I said in October I could smell the fudge being cooked in the Treasury and it is fair to say the fudge has now set."

He said a simple sum of the deficits and surpluses over the economic cycle showed a deficit of just £4bn, while measuring it as a share of GDP resulted in 0.2 per cent, or £14bn.

Since the surpluses were built up in the early years of the economic cycle, they benefit from being scaled up as a share of current GDP.

He said it was not a "terribly important" economic issue. "I would rather he broke the rule than raised taxes or cut spending just to meet it," he said. "However, there's a political issue if we have been sold a pup. Is it good for the Government's reputation to do the opposite of alchemy and turn gold into lead?"

The NIESR said the new cycle would begin with a deficit of £16bn, which Mr Weale said the Government would need to fill eventually. This follows a warning on Wednesday from the Institute for Fiscal Studies of a £13bn black hole - equivalent to 4p on the basic rate of income tax.

The NIESR said its estimate of a £16bn deficit was driven by forecasts for weaker growth in GDP and tax revenues over the coming two years.

Speculation is mounting that the Treasury is looking for areas where it can raise taxes without breaking its manifesto commitment not to raise income tax. Mr Weale said: "It is clear the ground is being prepared for increases in council taxation and particularly in business rates."

Business leaders fear a return to the system of the 1980s, when councils could exploit business rates as a way to raise money without hitting voters.