City experts warn of tax rises

City economists today accused Gordon Brown of stoking a preelection boom to win Labour a third term in power - and warned it could run out of steam.

The claim that Britain risked a return to "boom and bust" came from the respected Ernst & Young Item Club group, which used Treasury models to forecast the economy.

It predicted rapid growth of 3.25 per cent over the next two years but said the Chancellor was ignoringa £10 billion "black hole" in his finances and had "conjured up a classic pre-election boom".

Chief economic adviser Peter Spencer said: "A vibrant, dynamic British economy is what we all want - but the suspicion must be that this boom has been engineered for short-term political reasons, rather than long-term economic considerations. And the political business cycle was, after all, supposed to have been relegated to the history books by the new Labour government in 1997."

He said taxes would have to go up immediately after the election to make the Government's books

balance. The independent group said ideal conditions for a surge this year and next had been set by good news from the US and an upturn in world trade, while strong high street spending, booming house prices and a steadily rising stock market were all boosting the economy.

But it claimed the public finances would fall into the red by £8billion below Treasury 2006 predictions.

Its report follows claims that the ballooning housing market could crash - fears which were dismissed by the Chancellor at the weekend. Mr Brown said he was confident economic stability was here to stay. "I am confident that ... not only can we sustain it but we can see growth and we can secure the benefits of the world upturn," he said.

Meanwhile, a leaked Cabinet paper revealed that ministers are worried that the benefits of higher state spending have been party wiped out by falling productivity in the public sector.

The document said productivity in health and education has fallen by 15 to 20 per cent since 1997, implying a waste of some £20billion.