Treasury plans tax rise to cover cost of services

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Gordon Brown paved the way yesterday for the Government to introduce further "stealth taxes" with the aim of injecting more money into health and education.

The Chancellor told the Labour conference in Brighton that the threat of a global recession would not force the Government to abandon its multibillion-pound boost for public services over the next few years. He revealed that he wanted to see further investment for hospitals and schools when a three-year spending blueprint is drawn up by the Government next year.

Mr Brown said: "It is only by being cautious now, maintaining our discipline, and building public support for the Budget and spending decisions we will have to make in the coming months, that we will be able to achieve our aim in next year's spending review ­ to release further new resources for tackling poverty and for public services."

Last night, his aides signalled for the first time that Mr Brown would rather increase the overall tax burden than scale back the extra investment in hospitals and schools. They made clear that he intended to make the case to the country for a further injection of money.

The plan for another spending boost reflects the private fears of many ministers that it will be difficult to convince the voters they have delivered their June general election pledges to improve services without further investment.

Although Mr Brown yesterday ruled out an increase in income tax rates, he left the door open for backdoor rises such as through national insurance, which would increase the overall tax burden.

In the short term, the Chancellor is expected to sanction higher borrowing to enable Britain to weather the global economic storm and to meet the cost of the looming military operation in Afghanistan.

Mr Brown will argue that he has scope to raise public borrowing without breaking his pledge to balance the nation's books over the economic cycle. During this year's general election campaign, Labour dodged the question of how to fund a possible gap in its Budget plans before the next election.

Writing in The Independent today, Andrew Dilnot, the director of the Institute for Fiscal Studies, says that the Government may need to raise taxes by £5bn in the 2004-05 financial year to maintain the growth in spending on public services between now and then, with a further £5bn rise needed in the 2005-06 financial year. The Chancellor's comments will be seized on by the Tories as evidence that he is planning a further hike in "stealth taxes".

David Blunkett, the Home Secretary, told a fringe meeting in Brighton yesterday that plans for identity cards would not be included in the package of emergency legislation to combat terrorism being drawn by the Government.

He was seeking to head off a growing backlash from civil liberties groups and Labour MPs, who argued that the proposal would do nothing to counter terrorism.