Brown to raise taxes by 'at least £5bn' in Budget

Gordon Brown will raise taxes by at least £5bn in his Budget this month and the actual figure will be higher if he gives a significant boost to the National Health Service.

The Treasury is alarmed by predictions in the City that Mr Brown's repeated hints of big tax increases are a ruse designed to ensure that voters feel relieved if he announces limited rises on 17 April.

As the Chancellor finalises his Budget package, his officials have estimated that he will need to find an extra £5bn in order to stick to his strict fiscal rules and meet the cost of his flagship new child tax and working tax credits which take effect next year. This means Mr Brown may need total tax rises of between £5bn and £10bn to put the NHS on a secure long-term footing, a pledge which will be the centrepiece of his Budget.

The latest Treasury number-crunching will fuel speculation that the Chancellor, who has promised not to raise income tax rates, will announce a hike in national insurance. The options he is considering include abolition of the ceiling on employees' contributions, which would raise £6bn a year but hit everyone earning more than £29,900, and raising the rate of national insurance from 10 to 11 per cent, which would raise £3.3bn a year. The changes may take effect next year.

Efforts by Mr Brown and Tony Blair to prepare the public for tax rises have received a cool response from City economists. A report by Schroder Solomon Smith Barney suggested the Government could raise £10bn a year for higher public spending by running down the surplus built into its existing plans.

However, Mr Brown has rejected this course and has decided to stick to his strict rule that his current budget must be in surplus over the economic cycle. He has usually met this target by a comfortable margin in line with his cautious approach to economic management. But in his Pre-Budget Report last November, the Chancellor cut the predicted surplus for the 2002-3 financial year from £14bn to £3bn. He is expected to use this month's Budget to restore some of the surplus so that there is no danger of the rule being breached in future years.

A Treasury source told The Independent yesterday: "The Chancellor will stick to his cautious approach. He will not seek the soft option and is prepared to make the difficult decisions necessary to meet his tough fiscal rules while delivering on the Government's manifesto commitments on public services."

The respected Institute for Fiscal Studies (IFS) estimates the cost of bringing in the two tax credits for low income households at between £2bn and £3bn annually. Restoring the degree of caution over the budget surplus to previous levels would cost another £2bn.

In effect, Mr Brown needs to find £5bn just to "stand still" and before finding extra money for public services. His Budget will announce new spending totals for the three years starting in 2003-4, provoking a Cabinet battle before budgets of Whitehall departments are agreed in July.

The Treasury's own calculations suggest it would cost £2.5bn annually just to maintain the current rate of growth in NHS spending. It would cost £4bn a year to maintain the current increases for health and education and £4.5bn a year if transport is also protected.

Mr Brown will also come under pressure to find more money for law and order and defence, which are also seen as pressing political priorities.