DTI economist warns taxes must rise

Gordon Brown was infuriated today after a senior economist hired by Trade and Industry Secretary Patricia Hewitt said taxes would have to go up again to pay for his spending plans.

Vicky Pryce also infuriated ministers by describing the Chancellor's five tests on whether to join the euro as no more than "an informed guess". Her outburst comes less than a fortnight before the Chancellor delivers his spending review - and two days after he used his keynote Mansion House speech to bolster the credibility of the five tests.

Ms Pryce spoke out in a briefing at the Foreign Press Association where she admitted that some public services, especially transport, were becoming black holes which needed "loads more money" from the Exchequer. "To be reelected again the Government knows it has to spend a lot on public services.

"Transport in particular is becoming a black hole into which loads more money has to be poured."

Speaking remarkably frankly she implied that Mr Brown's Budget plans might not be robust enough to cope with a global recession. "We are in a bit of a dilemma about where we go from here, particularly due to a slowdown of the world economy," she said.

Ms Pryce, one of the City's most respected economists, was recently appointed chief economic adviser at the DTI and will take up the post in August.

Although she emphasised she was speaking in a personal capacity as a private-sector analyst, her remarks are embarrassing for Miss Hewitt, who is regarded as an ally of the Chancellor.

She added: "The expectation is that taxes quite soon may have to go up again and that will be even more important if the economy does not grow as fast as has been forecast." Ms Pryce said the City thought that the Treasury would "struggle" to achieve its planned two per cent growth this year and predicted a shortfall of up to £7 billion in 2004 if taxes did not rise.

Her remarks about the Chancellor's tests on whether or not Britain should join the single currency will be even more annoying for Mr Brown - and are certain to be exploited by Conservatives as proof that the tests are bogus.

Today it emerged that Mr Brown is planning to announce even more preliminary studies covering issues from labour mobility to exchange rates as part of the Treasury's advance work before it even begins a formal assessment of the economic tests.

A Treasury official said it would provide "a state of the art intellectual framework" that would withstand Tory charges that the tests are a political fix.

Ms Pryce claimed that "the tests in the end amount to an informed guess". "At the end of the day it is an opinion but you have to be able to justify it on economic grounds. Politics is absolutely central in this respect," she said.