Brown spending signals tax rises

THE spectre of new tax rises to fund Chancellor Gordon Brown's ambitious but increasingly costly spending plans was revealed yesterday.

The Chancellor has also warned Cabinet colleagues some budgets may have to be cut to make ends meet.

His message comes amid worrying predictions that Government borrowing will overshoot Treasury targets by as much as £40bn over the next three years - making tax rises all but unavoidable.

The problems will be underlined this week by a report which says Brown will hit a £10bn black hole in two years, and will have to raise taxes or cut spending to fill it.

The Chancellor hopes a recovery in the economy will ease his problems. But Britain's two biggest business organisations will say today that any growth is being smothered by red tape and regulation.

Concern about the nation's finances is spelt out in a letter to Cabinet Ministers from Brown's deputy, Treasury Chief Secretary Paul Boateng.

It makes clear that the recent public spending bonanza is over and some departments' budgets will have to be cut if Labour is to keep its spending promises for the NHS.

A report from City accountants Numerica this week will argue that the public finances can cope if, as expected, borrowing overshoots by £ 20bn over the next two years. But it said Brown will hit a crunch point in 2005-06 which will leave him with a £10bn black hole.

Maurice Fitzpatrick of Numerica said: 'The shoe starts to pinch in 2005 and the Chancellor will either have to cut spending by £10bn or raise taxes by a similar amount.'

Meanwhile, unease about Labour's handling of the economy is underlined today in reports by Britain's two biggest business organisations.

The CBI warned that red tape and regulations are ruining the UK's reputation as a good place to do business. The problem is exacerbated by 'appallingly low' levels of basic skills.

The CBI warned that Britain risks losing its position of having the most flexible labour market in the European Union. And it said key competitors - including Germany, France and Spain - were closing the gap.

More than half of the companies planning to quit Britain said labour costs were a key factor.

A survey by the Institute of Directors reinforced the gloomy mood. Half who took part said they had more paperwork as a result of new EU directives.

A Treasury spokesman said that the Chancellor's commitment to stability and tough fiscal rules had let him spend record amounts on hospitals and schools.

'This step increase in public spending to reverse decades of underinvestment is based on cautious and prudent assumptions and is fully financed,' he added.