Think-tank says Brown's forecast for borrowing is his least prudent

The Chancellor's reputation for prudence was further undermined yesterday when an independent think-tank said Wednesday's pre-Budget report was the least cautious forecast he had produced.

The Institute for Fiscal Studies (IFS) said the Treasury had based its outlook for the public finances on assumptions of future tax revenues that it might struggle to meet. Gordon Brown admitted he would have to borrow £20bn more than planned over the next two years because of the economic slowdown. But he said a sharp economic rebound would ensure he would not break his "golden rule" that public finances must balance over the cycle.

The IFS said the Chancellor was relying on an economic bounceback and a recovery in tax revenues to pull the public finances away from deeper deficits. Robert Chote, director of the institute, said: "He can say that no tax rises are needed to keep himself within his fiscal rules but the health of the public finances does look a bit more uncertain than in April and there may be tough choices ahead."

In its assessment of the public sector borrowing requirement, the institute said the Treasury had assumed that corporate tax revenues would be back at the levels they enjoyed before the stock market crash by 2006. Carl Emmerson, an IFS economist, said the forecasts were based on an assumption that both the economic downturn and the shock to the City would prove temporary. "It is quite clear he will be going forward with a set of forecasts that are less cautious than any he has produced in his first term in office," he said.

The institute is worried the financial services industry – which provides more than a third of corporate tax receipts now compared with 12 per cent two decades ago – might not recover so rapidly.

Alexander Kremm, another IFS analyst, said: "If you think that the profitability of the financial sector is linked to the unusual performance of the stock market then that is quite worrying. It is not clear that the contribution of the financial sector will be able to return to such a high level."

This was echoed by investment bank economists who warned that if the current fall in revenues, down 15 per cent this year, was structural rather than cyclical, then Mr Brown would be in danger of breaching his golden rule.

John Butler, UK economist at HSBC, said large parts of the surge in tax receipts were related to a stock market bubble. "Under our scenario much of the deficit turns out to be structural rather than cyclical, so borrowing could rise by a further £50bn over the next four years," he said.

The Treasury insisted yesterday that the figures were based on cautious assumptions. "There is a lot of caution built into these forecasts," a spokesman said.

He added that the National Audit Office had approved assumptions on the oil price, unemployment and the path for share prices.