Joining euro would add 3p to tax

JOINING the euro will cost the equivalent of an extra three pence on income tax, a report will reveal this week. That means, it says, those on an average salary of £21,320 will have to pay £192.40 more a year for the privilege of scrapping the pound.

The threat, which will electrify the debate in the run-up to the promised referendum on the single currency, will be highlighted in a report by City investment bankers Goldman Sachs on Wednesday.

News of the report emerged as former Labour Foreign Secretary Lord Owen warned that Tony Blair could lose his job if he fails to secure a yes vote in the referendum. He said the Prime Minister would be 'destroyed' if he called a referendum and lost. The peer - who opposes UK membership of the euro - said Blair risked losing his 'personal authority'. 'You cannot go to the country on a major issue as Prime Minister and be defeated and then expect to carry on in the same way,' said Lord Owen.

The report by Goldman Sachs will say that Labour will have to raise taxes by around £8bn a year. But, as the Government has ruled out income tax rises, the increase would probably have to be imposed in the form of another 1% on National Insurance or 2% on VAT.

The report will argue that the tax rise is inevitable because, to live comfortably with the euro, Britain must get its interest rates, currently 4%, down to the 3.25% of euroland. Unfortunately, the gap between them is likely to widen in the coming months.

At the same time, the experts say sterling is overvalued and will need to fall in value by 10% or more before entry. If it does not, many of our exporters will be at risk of going bust. But cutting interest rates and forcing down the pound will send inflation rocketing. To counter this, according to Goldman Sachs, Gordon Brown will either have to raise taxes - or take an axe to his plans to raise NHS spending, which would be politically impossible.

The bankers are expected to say that £8bn in tax increases, equal to 3p on the basic rate of income tax, are therefore inevitable. Treasury-Ministers fear the bill could be even higher as Brussels is muttering that Brown's high-spending April Budget breached the EU stability and growth pact. Once Britain is in the single currency, eurocrats could force Brown to impose extra tax rises of up to £15bn to cover spending he has announced.

There is yet another threat to Middle England from euro membership. The lower interest rates - and mortgage rates - resulting from membership are likely to fuel a renewed house-buying spree. Rising property prices would then fuel inflation. The Treasury would be forced to use the only weapon at its disposal - higher housing taxes - to cool the market.

A report by the No campaign, UK Mortgages and the Euro, written by Graeme Leach of the Institute of Directors, highlights this. Unlike Britain, most euroland countries impose VAT on homes. In France, the rate is 18.6%. The rest of Europe also has higher transaction taxes than British stamp duty. Finally, some European countries also levy capital gains taxes on the sale of homes, which is not the case, for primary residences, in Britain. With a high proportion of homeowners, Britain would suffer disproportionately if the European Central Bank started demanding a big increase in housing taxes.

Senior Tories seized on the revelations. Shadow Treasury Secretary John Bercow said: 'We're in for another great dollop of stealth taxes. Mr Brown will forever be known as grasping Gordon.'