New threat of tax rises

The prospect of huge tax rises to pay for the Chancellor's massive spending bill emerged today.

Experts warned that Government borrowing next year will be almost £10 billion higher than forecast by Gordon Brown in the Budget.

The Government's injection of cash into Britain's creaking public services means the Chancellor would have to raise taxes by the equivalent of 3p in the pound on income tax to plug a £10 billion "black hole".

A poll of more than 30 leading economists, compiled ironically by the Treasury, found that the Government will have to borrow £33.7 billion next year, against the Chancellor's forecast of £24 billion.

Not one of the experts polled in the Treasury survey shared Mr Brown's expectation of lower borrowing next year. It indicates a widespread view that he has been overoptimistic about tax revenues because of the sluggish economy

Figures released last week suggest the Government is on course to overshoot Mr Brown's forecast of £27 billion borrowing for the current year by about £6 billion.

The Treasury expects tax receipts to rise from 38.6 per cent of national income this year to 40.4 per cent by 2007-8, a prediction widely viewed as ambitious. The public spending review to begin in the autumn and be unveiled next summer is expected to be the tightest since Labour came to power in 1997, because of the Treasury's lack of room for manoeuvre.

Spending on health up to 2007-8 has already been committed, and education and crimefighting are also expected to do well out of the review. Other departments face the threat of real-term cuts.

Martin Weale, head of the National Institute of Economic and Social Research, a respected think tank, said: "None of our recent forecasts suggest anything other than that this spending round will be very difficult. We would expect the Government to peg the growth of spending because the deficit will otherwise get out of control."

The Chancellor faces a stark choice between raising taxes, cutting spending or increasing borrowing to bring his books into balance.

With many spending plans already set in stone and tax increases politically unpopular, a further plunge into the red for the Treasury's coffers looks the most likely option.

Economists say that borrowing can take the strain for the next couple of years, but warn that taxes will have to rise eventually if the Chancellor wants to continue pumping extra money into health, education, transport, law and order and other key public services.

Some experts have suggested that Britain's public finances could be too shaky for it to join the euro. They say there is a growing risk of the Treasury breaching the Maastricht entry criterion.

This states that all countries wishing to join the single currency must prove they are not borrowing more than three per cent of gross domestic product.