Chancellor may be forced to cut back public spending

Gordon Brown may have to reducespending on education and defence to balance the nation's books,a report by a Blairite think-tank says.

In an assessment that will reignite claims of a "black hole" in Labour's spending plans, the Institute of Public Policy Research (IPPR) warns that the Chancellor may have to either freeze the proportion of national income spent on education or make cuts in transport and defence to maintain the drive to reduce child poverty.

Researchers said tough choices on key public services will need to be made in July's three-year spending review for ministers to fulfil their pledge to increase health spending to the European average without raising taxes. They raised questions about the Chancellor's ability to deliver sustained investment in public services ahead of next week's Budget, warning that Mr Brown faced making "unpalatable choices" to maintain increases in health spending.

Peter Robinson, the senior economist at the IPPR, said: "The stakes could not be higher." He warned spending on public services would fall by 2007-08 to allow the proportion of GDP allocated to health to increase in line with Mr Blair's pledge.

He said: "The period where public services other than health might look forward to enjoying a significantly higher proportion of the nation's resources is at an end.

"For most public services, spending as a proportion of GDP will have to remain stable or will have to fall in the next Parliament.

"Literally we are slicing up the pie baked by the Chancellor. The 2004 spending review is all about slicing up the remaining pie once health has been taken out."

The IPPR report said forecasts for economic growth would still allow increases in spending on education and other services. But it warned that they would fall short of the record rises of recent years. A freeze in the proportion of GDP spent on education would produce real terms annual increases of about 2.5 per cent, compared with 6 per cent real terms rises in recent years.

Mr Robinson said: "The proportion of GDP for all the public services other than health on average will have to fall, so some core areas of public service are going to have to see their proportion of GDP decline. The spending review process is going to be about identifying those services."

The report said total spending as a proportion of GDP was planned not to rise significantly between 2005-06 and 2007-08, the end of the period covered by July's spending review.

It warned that proposals for "co-payment" to introduce measures such as congestion charging and road toll could not be implemented in time to fill any funding shortfall.