Brown's tough choice on taxes

CHANCELLOR Gordon Brown will today set out the Government's stall for the run-up to the next General Election with his Pre-Budget Report.

The Chancellor is expected to focus on the fact that the British economy is about to enjoy its 50th consecutive quarter of growth, which is the longest sustained period of economic growth since records began.

But analysts believe that the immediate future may be somewhat less rosy. In particular, the Chancellor will have to address the expected gap between public spending and revenue.

The Conservatives claim that a Labour victory at the General Election will lead 'inevitably' to third-term tax rises.

Shadow Chancellor Oliver Letwin believes the Chancellor has over-committed himself by expanding spending on public services and now has a shortfall of several billion pounds.

According to the independent Institute for Fiscal Studies, the Chancellor is running the risk of breaking his so-called 'golden rule', which states that the Government should fund current spending only from current tax revenue and not borrow to shore up public spending over the course of the economic cycle. ?

Brown's problems stem from the fact that tax revenue has been much lower than he expected.

The economy is growing close to the rates the Chancellor predicted but, according to Grant Thornton senior tax partner Mike Warburton, anticipated tax revenue targets were some way off.

Warburton said: 'Gordon Brown was over optimistic in terms of what he forecast he would bring in in tax receipts.'

To fill the looming gap in his figures, the Chancellor will have to make hard choices. He can either cut public spending, raise taxes or increase borrowing.

Stephen Herring, tax partner at BDO Stoy Hayward believes that tax rises close to a General Election are a 'non-starter'.

'A possibility could be to increase VAT, to bring it more in line with the European average. Or he could increase National Insurance contributions, on the grounds that this isn't the same as raising income tax. He could say this is being used to pay for Britain‘s pensions crisis.'

Other tax experts believe a clampdown on the business sector is more likely, including a possible war on corporate tax avoidance.

Fears that the business community might be targeted have prompted pleas from the CBI to leave UK companies alone.

But with an election to win Brown might act on the basis that there are fewer votes to lose by clamping down on the City and big business.

Pre-Budget report