3p on tax to bail out Brown

TAXES will have to rise by at least £11bn to pay for the Government's spending plans and get the public finances back on to a sound footing, Chancellor Gordon Brown was warned today.

With tax revenues failing to bounce back as hoped and the public finances sliding deeper into the red than planned, the Institute for Fiscal Studies (IFS) said the Chancellor is on course to miss his Golden Rule - to borrow only to invest over the economic cycle. That means Brown will have little choice but to raise taxes after the general election.

'To put the public finances back on a path as strong as the Treasury aimed for in the 2004 Budget would require a tax increase of at least £11bn,' the IFS said in its influential Green Budget, which sets out the Chancellor's options in his forthcoming Budget. That is the equivalent of more than 3p on income tax.

With borrowing set to overshoot Brown's forecasts by £9bn over the next two years, the think-tank urged him to take action as soon as possible.

'The longer the adjustment is delayed, the larger and more abrupt it is likely to have to be,' the IFS said. 'That suggests that the Chancellor should certainly take action in Budget 2006, if he is not prepared to do so in the run-up to the election.'

Another 1% on National Insurance contributions is seen by experts as the most likely move.

However, the IFS says Brown could meet the Golden Rule, and reduce the need for swingeing tax rises, by bringing forward the end of the economic cycle to the current financial year - rather than 2005-2006 as currently assumed - thereby pushing next year's borrowing into the next cycle.

In another blow to Brown, the IFS said there is a 50-50 chance of public sector net debt breaching the 40% of national income limit laid down by his sustainable investment rule in 2008-2009.

And it said that despite Brown's boasts, there is no strong evidence that economic stability and Government policies have raised the sustainable long-term growth rate of the economy and living standards.

The think-tank added that while the Chancellor's long-term growth forecasts were 'plausible', his short-term projections were 'probably too optimistic'. Brown has forecast the economy will expand by 3% to 3.5% this year but City economists believe 2.5% growth is more likely.

Meanwhile, having risen steadily under Labour, the tax burden is set to hit a 25-year high by the end of the decade, according to the IFS. By next year, Labour will be taking 2.1% more of national income in tax than the Conservatives did in 1996-1997.

It expects to take a further 1.3% by 2009-2010, increasing Government revenues to 40.5% of national income - the highest since the mid-1980s.

As a result, national income after tax is forecast to grow more slowly over the next five years than at any time since the early 1980s. Households are on average £3.62 a week worse off under Labour. Excluding council tax rises, they are 82p better off.