Warning of £11bn deficit

Gordon Brown will have to increase taxes by £11billion to plug the hole in the public finances, a leading economic think tank warned today.

In a huge blow to Labour's election campaign, the respected Institute for Fiscal Studies raised serious doubts about Mr Brown's claim that taxes would not have to rise in a third Labour term.

The institute said that Britain now carried one of the largest structural budget deficits in the industrial world and it warned that the situation was likely to "deteriorate" without government intervention.

In a stark warning, it said the Chancellor could not meet his golden rules without "needing to announce new tax increases".

The institute said: "We think he may need to raise another £11billion."

It said that Labour's record counciltax rises had left households worse off overall since 1997 - and undermined moves to tackle the work-shy. The institute found that Mr Brown's tax credit give-aways were wiped out by rises in council tax and National Insurance.

The think tank also warned that the Liberal Democrats would need to raise taxes if elected to government to pay for their spending plans "if revenues undershoot Treasury forecasts".

In its analysis of the spending plans of the three main political parties, the IFS also raised questions about Conservative policies. While it concluded that the Tories should be able to avoid having to announce new tax increases, it said that the party's plans rested on the assumption that they could cut spending "quickly and painlessly".

The report added: "Past experience suggests caution." In a grim conclusion, the IFS noted: "Whoever wins the election, the tax burden is likely to be higher at the end of the next Parliament than at the end of this one.

"And even the Conservatives' proposed spending cuts would only reverse half the increase in spending seen since 1999. The similarities between the parties are as striking as

the differences." Elsewhere there was some good news for the Government as the IFS pointed out that the UK remained a low-tax economy compared with other European Union countries.

But it raised doubts about Tony Blair's pledge to bring health spending up to the EU average.

The report said British health spending in 2005-06 was likely to remain below the "weighted average" of spending among EU countries in 1998, "let alone what they had spent ... more recently".

The IFS warning comes after the Confederation of British Industry said that Labour plans to raise business rates could undermine confidence in the Government.

Although the CBI had been expected to sit out the election campaign period, it intervened to voice mounting concern that companies would bear the brunt of any thirdterm Labour tax rises.

It said plans to raise the contribution made to town halls by local firms would risk a repeat of the blow when employers' National Insurance went up and "seriously undermined business confidence in Government".

There is a near consensus among independent forecasters that taxes or borrowing are likely to go up after the election.

The gloom in Britain's struggling retail sector deepened today after official figures showed a shock fall in high street sales in March. They dropped 0.1 per cent, pulling the year-on-year rate of increase down to 2.7 per cent - the weakest since August 2003. Economists said the news reduced the chances of a rise in interest rates after the election.

The IFS said that over the next three or four years, tax revenues will rise to the highest level for 20 years, hitting a peak of about 40.6 per cent of national income compared with 34.8 per cent when Labour took office.

Birmingham City Council deputy leader John Hemming sought permission in London to apply for a judicial review amid fears the arrangements are open to fraud.