Brown may need to raise taxes

GORDON Brown is in danger of breaking his own fiscal rules, the Organisation for Economic Co-operation and Development has warned.

The Chancellor will need to raise taxes or cut spending to balance the books.

The Paris-based OECD questions whether Brown will be able to meet the 'golden rule' under which current spending must be covered by tax revenues over the economic cycle, and borrowing is only for investment.

The report says: 'OECD projections are that the deficit will not fall below 1% (of total wealth) over the next two years. Further measures may be required to meet the rule over the next cycle.'

It estimates above-trend economic growth for Britain of 3.1% this year, below the level predicted in the April Budget, and 2.7% in 2005.

But it is much more negative on the European Union.

'The recovery is still to a large extent bypassing Continental Europe,' it says, calling for lower interest rates to stimulate output.

EU growth will be just 1.6% this year, down from the previous projection of 1.8%. Fuelled by the Chinese boom, growth in Japan will climb to 3% and the US will achieve 4.6%.

The OECD warns all industrial countries that they should use the upswing in the economic cycle to cut budget deficits over the longer haul.