Brown will have to raise extra £20bn in tax, says think-tank

Philip Thornton,Economics Correspondent
Friday 25 October 2002 00:00 BST
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The Chancellor, Gordon Brown, must hike taxes by £20bn in the run-up to the next election – equivalent to 6p on income tax – to keep the public finances solvent, a respected independent think tank warned today.

A slump in tax revenues has blown a hole in the Treasury's forecasts, the National Institute for Economic and Social Research said.

Its director, Martin Weale, said the Treasury would be under huge pressure to "fudge" its own fiscal rules to delay any tax hikes and urged the Government to set up an independent commission to oversee their operation.

The institute said without higher taxes, the planned surplus in 2006 would vanish and be replaced by a deficit, breaking the Chancellor's rule that the budget must be balanced over the economic cycle.

Mr Weale said with the current cycle likely to end in 2004 the new cycle would begin with large deficits, which would send a "nasty message".

"It means that in the run-up to the next election the fiscal rules would say that he needs to cover the deficit and raise taxes," he said. "That is not a situation I would want to be in before an election and if I were at the Treasury I would be getting my calculator out and deferring the cycle so the rules could be met.

"The Treasury will be able to fudge the cycle. I can already smell the fudge being cooked."

The Treasury reacted angrily to his comments, branding them "outrageous". A spokesman said: "That is nonsense. If anybody has any evidence to substantiate that they should come forward and produce it."

Mr Weale said dating the cycle was a matter of judgement that should be given to an independent body such as the National Audit Office or Bank of England.

The Conservatives latched onto the issue, pointing out that the Budget said the date for the start of the current cycle in mid-1999 was "provisional".

Michael Howard, the Shadow Chancellor, said: "How on Earth can Gordon Brown pretend his fiscal rules are so rigorously prudent when he can't know how long the economic cycle will last, and what stage of it we are in."

In its quarterly forecasts the institute said the prospects for the public finances over the next five years were "worrying".

Economic growth would come in well below the Treasury's forecasts, with GDP growth of 1.4 per cent this year and 2.5 per cent in 2003, compared with official forecasts of 2.25 and 3.25 per cent respectively.

It criticised as "unrealistic" Treasury forecasts that tax revenue would continue to rise. Instead it said receipts would start to slow from next year.

The report, which comes in the wake of a similar warning from Ernst & Young, said the stock market slump, declining personal consumption and lower earnings would all drag tax revenues down. It said receipts would be 1.3 per cent of GDP, or £13bn, lower than government forecasts by 2006.

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