Voters face £11bn tax rise to fill hole in finances, says IFS

Voters face the threat of an £11bn tax rise to fill a gaping hole in the public finances, a respected independent think-tank said yesterday.

Voters face the threat of an £11bn tax rise to fill a gaping hole in the public finances, a respected independent think-tank said yesterday.

The Institute of Fiscal Studies said Gordon Brown, the Chancellor, would have to raise taxes or slash spending to avoid breaking his cherished "golden rule" on the public finances.

The report was seized on by the Conservatives, who said it meant a £1,000 tax increase for the average family, but this was strenuously challenged by the Treasury, which said it was on track to meet its rules.

The IFS said there was an £11bn hole in the public finances, which would rise to £13bn if the Chancellor delayed taking action until next year. In its annual 200-page report it said weaker economic growth and tax receipts than the Treasury had forecast would leave the public finances in the red.

The golden rule dictates the Government must not borrow to fund current spending - day-to-day costs such as salaries and benefit payments - when averaged across the economic cycle.

To hit the rule Mr Brown would have to unveil an £11bn tax rise in the forthcoming Budget. If he wanted to avoid a pre-election tax rise, he would have to hit the electorate with a £13bn tax hike - equivalent to five pence on the basic rate of income tax - in April 2006.

Robert Chote, the director of the IFS, said: "The longer the adjustment is delayed, the larger and more abrupt it is likely to have to be."

The report in effect fired the starting gun for a likely May General Election. Oliver Letwin, the shadow Chancellor, said it meant a tax rise of £1,000 a year for a typical working couple on average earnings. "There is now a simple question, which we will repeat and repeat until it is answered," he said. "Mr Blair, which taxes are you going to raise - national insurance contributions again, or income tax, or VAT on food or capital gains tax on homes?"

The Treasury rebutted the Tory figures, saying families with children were £1,300 a year better off under Labour, and accused the IFS of changing their forecasts.

Paul Boateng, the Chief Secretary to the Treasury, said: "Figures and forecasts from think-tanks and other pundits come and go. They change week by week. On our foundation of economic growth, low inflation, low unemployment and sound public finances, it's clear that all the Government's spending plans, set out through to 2008, remain fully affordable."

In its report, the IFS said the current budget deficits in 2004/05 and 2005/06 - the final two years of the Treasury's economic cycle - would be £3.4bn and £6.5bn larger respectively.

Its economic forecasts, carried out with Morgan Stanley, showed economic growth falling short of the Treasury's forecasts. It said GDP growth would come in at 2.9 per cent next year, falling to 2.1 per cent - well below the Treasury's forecast ranges of 3.0-3.5 per cent and 2.5-3.0 per cent respectively. It said that since the Government had laid down its spending plans through until 2008, new tax increases were more likely.

The IFS said the Chancellor could escape breaching the golden rule by declaring the cycle had already ended, in line with Morgan Stanley's forecasts. However, this would leave it starting a new cycle with larger deficits.