Senior economic adviser warns taxes may rise to pay for public services

One of the Government's most senior economic advisers has warned taxes may have to rise further to pay for improvements in public services.

The newly-appointed chief economic adviser at the Department of Trade and Industry said yesterday that the Government may not be able to finance increased spending on health, education and transport without raising taxes again.

Vicky Pryce said that some public services, such as transport, were becoming a "black hole" which tax payers' money will continue to be poured into so that the Government can win the next election.

"To be re-elected again the Government knows it has to spend a lot on public services. Transport in particular is becoming a black hole into which loads more money has to be poured," she said in a briefing to the Foreign Press Association.

"We are in a bit of a dilemma about where we go from here particularly due to slowdown of the world economy."

Ms Pryce, who will take up her post in August, risked infuriating the Treasury by suggesting that its growth forecasts were unlikely to be met.

She also dismissed the Chancellor's five economic tests for joining the Euro as "an informed guess" and predicted that the decision to enter the Euro would not be purely economic as claimed but would also have a political element.

Ms Pryce, who is one of the city's most respected econ-omists and was a former chief economist at KPMG, hinted that the Government would only hold a referendum on the Euro when it was sure it could win. "It will be judged in the end on whether the electorate is right for the Government.

"It will be difficult for the Government to go out and lose it. They will have all kinds of pollsters working on it. Right now the mood has become slightly negative," she said.

"At the end of the day it is an opinion but you have to be able to justify it on economic grounds. Politics is absolutely central in this respect."

Her unguarded comments were made in a personal capacity but they are likely to prove embarrassing for Patricia Hewitt, the Trade and Industry Secretary, who has been keen to avoid a rift with the Treasury on economic issues.

Ms Pryce suggested that because of long-term problems in Britain's manufacturing sector, the global economic slow-down and problems with productivity Treasury growth figures are unlikely to be met.

The Chancellor has tied his spending plans for public services to a forecast of growth from 2-2.5 per cent this year to 3-3.5 per cent in 2003.

"The consensus is that 2 per cent growth this year is something the Treasury will struggle to achieve," she said.

Ms Pryce warned ahead of next month's spending round that the Government may be about to pledge money it cannot afford.

She added: "The expectation is that taxes quite soon may have to go up and that will be even more important if the economy does not grow as fast as has been forecast."