Growing black hole in public finances

Gordon Brown faced a fresh warning today that a growing “black hole” in Britain’s public finances could force him to put up taxes before the next

The alert was sounded in a report from the influential Ernst& Young Item Club, which uses the Treasury’s own economic model for its forecasts.

It said it expected net borrowing to be more than £36billion this year — nearly £10billion more than the Government’s official forecasts.

Economists have warned the Chancellor, on paternity leave following the
birth of his son John on Friday, that there are only three ways he can deal
with the burgeoning deficit.

These are scaling back his plans to spend billions more on schools and
hospitals — a move he has vowed not to make — breaking his “golden rule” by
increasing borrowing, or raising taxes.

The Treasury has denied weekend reports that Mr Brown is planning to levy capital gains tax, at up to 40 per cent, on the profits from all home sales
in a move which could bring in £11billion a year.

At the moment the tax only hits sales of second homes. Reports claimed Mr Brown had discussed levying it more widely, but these were dismissed as “garbage” and “irresponsible nonsense” by the Treasury.

The original allegation was sourced to accountants PricewaterhouseCoopers,
but the firm today denied it had discussed the issue with the Treasury.

Capital gains tax on all house sales would put a brake on rising house
prices, but the political backlash from Middle Britain would make it almost
impossible to impose.

The Tories were quick to exploit the situation, with shadow chancellor Michael Howard claiming: “Whether or not the story proves to be accurate, it serves to show what a mess the public finances are in.”

Professor Peter Spencer, economic adviser to the Item Club, said: “Unless
the Chancellor wants to break his golden rule about borrowing, he is
either going to have to scale back the public spending figures or raise taxes
in the run-up to the next election.”

The golden rule states that tax revenues and current spending should at
least balance over the course of an economic cycle. Professor Spencer said
breaking it would be as disastrous as Britain’s 1992 humiliating exit from the
European Exchange Rate Mechanism.

The Item Club said the Government’s current account deficit was again likely
to be far higher than Treasury forecasts at about £17 billion for this financial year. The deficit is already at £14.4 billion in the first five months of the year, nearly double last year’s £7.9 billion.

However, there was some good economic news for Mr Brown as the Item Club revised its GDP growth forecast from 1.7 per cent to 2 per cent — at the
lower end of the Chancellor’s own range of 2 per cent to 2.5 per cent.