Brown plans could mean billions more in tax, warns IFS

Gordon Brown may need to raise even more extra tax than the £26bn he has pencilled in during the next Parliament should Labour be re-elected, an influential economic think-tank warned yesterday.

Gordon Brown may need to raise even more extra tax than the £26bn he has pencilled in during the next Parliament should Labour be re-elected, an influential economic think-tank warned yesterday.

The Institute of Fiscal Studies joined the chorus of leading City economists forecasting big tax rises or spending cuts after the election to plug a looming black hole in the Government's finances.

The IFS warning came as Mr Brown refused to rule out tax rises to cover what analysts claim is a £10bn gap in the Chancellor's figures caused by tax revenues coming in below his forecasts and spending overshooting.

The IFS said the Chancellor was predicting a £26bn rise in the tax burden over the next Parliament, compared with £16bn in tax hikes since Labour came to power in 1997. But if tax revenues do not rebound, then Mr Brown would have to announce fresh tax-raising measures to fund the Government's spending plans and meet his golden rule of borrowing only to fund investment rather than day-to-day spending over the economic cycle.

Mr Brown refused to offer a guarantee yesterday that taxes would not rise. "No politician should make the mistake ... of saying no matter what the circumstances are they can make all sorts of guarantees on every individual thing. That is not what politicians should do and it would not be responsible to do it," he said.

When Mr Brown unveiled his pre-Budget report on Thursday he insisted he would meet his golden rule in this economic cycle (1999-2006) and the next. He conceded a slight deterioration in the finances this financial year and next.

Robert Chote, the director of the IFS, said: "It's clearly touch and go now whether the golden rule will be met. He's placed his credibility on the line." He said Mr Brown had at best a 60 per cent chance of meeting it this cycle and said the next cycle also looked somewhat doubtful.

Mr Brown was confident he would not suffer the embarrassment of missing his own rules, saying spending growth would slow and tax revenues would pick up, buoyed by the lagged impact of higher oil prices. He raised his forecast for the current budget deficit this year to £12.5bn, £2bn higher than his Budget forecast in March.

That, combined with a further deterioration in the following year, means the margin by which the Treasury expects to overachieve the golden rule has shrunk to £8bn from £11bn at Budget time - and £124bn in March 2001. The Chancellor would finish the cycle with a budget surplus of 0.1 per cent of GDP.

But according to IFS estimates, Mr Brown would miss his golden rule by £2bn if the trends in spending and receipts so far this year continue. He revised down his Budget forecast for receipts growth this year from 7.8 per cent to 7.3 per cent this week. But the first seven months of the year have seen growth of only 6.9 per cent, meaning that a pick-up to 7.8 per cent is needed over the last five months of the fiscal year.

Conversely, central government spending growth has come in higher than forecast at 6.6 per cent so far this year and will need to slow to 3.8 per cent if Mr Brown is to achieve his new prediction of 5.4 per cent for the year.

City experts also thought Mr Brown's forecast of economic growth of between 3 and 3.5 per cent next year, when the Bank of England is only predicting about 2.5 per cent, was too optimistic. David Miles at Morgan Stanley said that 1 percentage point less growth would be enough to erode entirely the margin for error on the golden rule.

John Butler at HSBC said: "The day of reckoning on the golden rule has been put back but ultimately for the golden rule to be met on an ongoing basis either taxes will need to rise or spending cut following the next election, expected on 5 May."