£7bn tax rise warning

GORDON Brown was dealt a fresh campaign blow today by a major report claiming he has broken his fiscal rules and will have to raise taxes by at least £7bn a year.

The National Institute of Economic and Social Research (NIESR) also said interest rates have further to climb and warned that low savings and sluggish productivity growth could jeopardise Britain's future prosperity.

With less than a week until polling day, the think-tank predicts the economy will grow by a modest 2.7% this year, below the 3% to 3.5% forecast by the Chancellor in the Budget.

But its assessment of the public finances is the most damaging to Brown. It believes the economic cycle has just ended and the latest Government borrowing figures suggest the Golden Rule - to borrow only to invest - has been broken.

'We expect the Golden Rule will be hard to meet over the new economic cycle without an increase in taxes,' it said.

The NIESR joins a growing list of organisations, including the Institute for Fiscal Studies, the International Monetary Fund and the Organisation for Economic Co-operation and Development, that warn taxes will have to rise after the election to plug a black hole in the public finances.

The IFS has said tax rises of £11bn a year are needed, equal to more than 3p on income tax.

Accountants Grant Thornton said today an increase in National Insurance was the most likely choice. 'If Gordon Brown returns as Chancellor and stays true to current form, it is oddson that his target for tax-raising measures will be NI,' said UK head of tax Ian Evans.

On interest rates, the NIESR said rising inflation will force the Bank of England to act. 'Our view remains that interest rates should already be higher than they are and we expect at least one further increase,' it said.

'It is, however, a mistake to regard this as the peak of the interest rate cycle. From a position where growth is close to trend and the output gap has been closed, it is as likely that subsequent changes will be upward as that they will be downward.'

The NIESR said the economy had performed well under Labour but added that two 'substantial' flaws remained a worry: first, that saving is inadequate and, second, that productivity is lower than in the US and several European countries.

Interest rate views split

A SLIM majority of bond market experts believes interest rates will remain frozen at 4.75% for the rest of the year, a new survey shows.

A poll of 50 bond traders and analysts by IDEAglobal found 36% expect the Bank of England's monetary policy committee to sit on its hands throughout 2005. Of the others, 30% expect a cut and 33% expect a rise. The split vote reflects the uncertain economic outlook.

The US Federal Reserve is expected to raise rates by another percentage point to 3.75% before pausing while the European Central Bank is not seen lifting its borrowing costs until the first quarter of next year.