Families face extra £1,000 in taxes

FAMILIES face tax rises averaging £1,000 a year if Labour wins a third term in power, Britain's most respected economic forecasters has predicted. The Institute for Fiscal Studies said taxes would have to rise by £11bn in the next Parliament if the party is re-elected.

For the average working couple, that would mean a tax increase of around 3p in the pound, or £1,000 a year.

The verdict of the independent institute raises doubts about Chancellor Gordon Brown's assurances that tax will not have to rise if Labour wins on 5 May.

The institute said Britain had one of the worst structural budget deficits in the industrial world and the situation was likely to 'deteriorate'. It warned that the Chancellor could not hope to meet his 'golden rule' of borrowing only to invest and not to finance current spending without tax hikes.

In a boost for the Tory General Election campaign, the institute endorsed Conservative plans to cut public spending by 2% of national income to pay for £4bn of tax cuts. It said the Tories were more likely than Brown to meet the 'golden rule'.

The Institute, which has studied the tax and spending commitments of the three main parties, said Labour was overestimating the increase in the amount it would receive if tax rates remain the same over the next few years.

'The Chancellor believes this will happen without him needing to announce new tax increases; we think he may need to raise another £ 11bn,' it said.

The institute said that over the next three to four years, tax revenues were set to rise to the highest level for 20 years - hitting a peak of 40.6% of national income, compared to 34.8% when Labour took office.

Brown has promised to massively increase funding for schools and hospitals at a time when revenues from company tax, fuel duties and VAT have been lower than expected. By contrast, the institute said the Tories' spending plans should allow them to avoid tax rises if they gain power.

'The Conservatives plan to announce tax cuts worth £4bn in the first Budget and after six years to cut spending relative to Labour's plans by £25bn in today's terms,' it said. 'By cutting borrowing, they should avoid the need to announce new tax increases (or reverse their own tax cuts) even if revenues are weaker than the Treasury expects.'

The Institute said the Liberal Democrats were proposing 'slightly higher spending and a slightly higher tax burden than Labour'. It added: 'Like Labour, they will need to announce new tax increases to pay for their spending plans if revenues undershoot Treasury forecasts.'

The institute urged caution, however, over claims by all three parties that they could save billions by cutting Government waste. It said previous efficiency drives had not delivered spending cuts as quickly and painlessly as had been assumed.

Shadow Chancellor Oliver Letwin said of the study: 'This is yet another confirmation of what almost every independent expert is now saying - that there's a large hole in Mr Blair's finances which will have to be filled by higher taxes if Labour wins the election. The only question is which tax it will be.'

The Institute's predictions came after moderately better than expected public finance figures for March, which meant Brown met his borrowing forecast for 2004-2005. But he dismissed the institute's findings. He said: 'People said Britain would suffer recession. We proved them wrong. People say we won't meet our fiscal rules. Once again, with the public finances strong, we will prove them wrong.'

There was more bad news on Labour's tax record after official figures showed an extra half a million people would pay income tax next year following Brown's March budget. He failed to raise tax allowances to keep pace with rising pay rates. That meant more were caught by the net and liable for income tax.

Revenue and Customs estimates show that in the next tax year 30.5m people will be liable to income tax. The number broke the 30m barrier last year.

Since Labour came to power the numbers liable for income tax has jumped by 4.7m because the threshold has not kept pace with higher wages. In the Tories' final year of office 25.7m were caught by the income tax net.