Improving schools and hospitals will require 4p tax rise, Blair told

Tony Blair will have to have to raise taxes by up to 4p in the pound if he is to deliver his policies on improving schools and hospitals, aLabour think-tank has warned.

The Institute for Public Policy Research (IPPR), which has close links to Downing Street, said that ministers cannot fool voters with "stealth" taxes and should begin arguing the case for raising income tax to fund improvements in public services.

The report, which is by an IPPR economist and which will be published before the Labour party conference in the autumn, says that the Chancellor's "war chest" will fall into deficit by 2004 and that taxation will have to increase by £14bn – or 4p on the standard rate of income tax – if the Government is to fulfil its second-term promise of increased funding to improve schools and the health service.

"Tax policy cannot proceed on the basis that you can fool most of the people most of the time," the report says.

Tony Blair has pledged not to raise income tax during his second term – a promise he first made when he was elected in 1997. But the IPPR says Labour "has been raising taxes and is now increasing spending rapidly while still claiming that this does not amount to old-fashioned tax-and-spend".

Opposition politicians backed the findings and said the Government should not pay for its spending with stealth taxes. "Labour will be forced to raise taxes, probably stealthily, in order to maintain anything near what their spending rate is now in 2002 to 2004," said Ed Davey, the Liberal Democrat shadow chief secretary to the Treasury.

The report does not take into account the prospect of a recession, which could put further pressure on the Chancellor. It criticises Gordon Brown's argument that productivity increases could deliver sending pledges without raising taxes as "highly imprudent".

Tony Blair is likely to face stiff opposition from Union delegates and left-wingers, who want a return to transparent tax-and-spend policies, at the party conference over funding proposals for the public sector.