Brown 'must raise taxes to pay £17bn deficit'

Gordon Brown will have to raise taxes next year to bring the public finances back into balance, an independent economic think-tank warned yesterday.

Gordon Brown will have to raise taxes next year to bring the public finances back into balance, an independent economic think-tank warned yesterday.

The Item Club confirmed the two forecasts it issued last month, saying the Chancellor would break his "golden rule" on tax and spending. It said that another large deficit this year meant the Government would have spent more than it raised on tax over the course of the economic cycle - breaking the rule.

Item, which uses the Treasury's economic model, said the Government would rack up a current deficit - the measure used for the rule - of £17bn rather than the £11bn the Chancellor forecast in his March Budget. Peter Spencer, the club's economic adviser, said the Chancellor would benefit from extra oil revenues and lower spending growth. "But the golden rule is still likely to be broken next year."

He said: "The Treasury will begin the next cycle with a large structural deficit and the method it uses for assessing the rule will add urgency to the need to raise taxes after the election."

Because the Government calculates the figure as a percentage of GDP, the Treasury will have to score larger surpluses at the end of the next cycle when GDP is larger than the deficits at the start to make the accounts balance.

In March, the Government forecast it would end the cycle - which began in 1999 and is set to end in 2006 - with a deficit of 0.1 per cent of GDP, or £11bn. But other independent analysts, such as the National Institute of Economic and Social Research, have warned the Government will need to raise taxes by at least £10bn - equivalent to 3p on income tax - next year.

Professor Spencer said the driving factor behind the deficit in the current year was a shortfall in corporation tax revenue. He said total tax revenues would undershoot by £6bn, which was "disappointing" given the strength of the economy and the recent rise in oil prices.

He said half of this was made up by a £3bn shortfall in corporation tax receipts. "This comes as no surprise as we said at the time of the Budget that the Treasury prediction of a 21.3 per cent rise was over-optimistic," he said. He admitted that the final out-turn might be boosted by the average rise in oil prices of $10 a barrel, which should add £1.4bn in North Sea royalties and petroleum revenue tax receipts, although it had not yet appeared in the figures.

A Treasury spokesman said the Government was meeting the fiscal rules but he could not comment further before next week's pre-Budget report that will update the forecasts.