Warning of spending black hole

BRITAIN is facing billions of pounds of further tax rises, a leading economic think-tank has warned. The National Institute for Economic and Social Research says the Government needs either to increase taxes or cut spending by 1.5% of national income by 2006/7 to close a growing black hole in the public finances.

That is equivalent to £20bn, or 7p on the basic rate of tax, though Chancellor Gordon Brown is likely to try to raise the money in other ways.

In addition, the Government would need to raise a further 2.1% of national income - about £26bn, or 9p on income tax - to meet healthcare recommendations by former NatWest banker Derek Wanless, who was commissioned to produce a report on the NHS.

The institute's warnings came as the Treasury Select Committee questioned Brown's sums, saying it was concerned the Budget forecast for economic growth is too high. It forecasts 1.8% growth this year, or lower if exports fail to pick up. Brown is banking on 2% to 2.5%.

The NIESR said the hole in public finances was being caused by an increase in spending and borrowing, set against 'over-optimistic' forecasts on the levels of tax revenue. It added: 'The Budget leaves the public finances less healthy than for some time. The big expansion in spending announced by Mr Brown will leave a further substantial shortfall in tax revenue.'