Experts warn of Brown's tax bombshell

Gordon Brown will raise taxes under the next Parliament by three pence in the pound to meet his self-imposed "golden rule" for public finances, leading economists have warned.

The National Institute of Economic and Social Research and Barclays Capital both condemn the Chancellor's prized calculation, with David Hillier, UK economist at the investment Bank accusing him of "lying and cheating."

The accusations centre upon claims this year's budget deficit would be several billion pounds larger than Mr Brown forecast in his March Budget, despite ongoing reassurance of fiscal success from the Treasury.

Institute director Martin Weale said an extra £10bn a year from next year will be needed to balance the books - or 3p on income tax.

He predicts tax rises and spending cuts, and condemns the method behind the 'golden rule', which means expenditure should be at least matched by current tax receipts over one economic cycle, as something "plainly wrong."

The more fierce attack comes from chief economist at Barclays, David Hillier, who says the government will have to borrow around £37bn in the next financial year instead of the £31bn that is factored in.

Both parties agreed Mr Brown was wrong to pledge in March, that last year's £37bn deficit was the low point with a gradual shrinking expected in the next few years.

They also suggest the Treasury is supporting a statistical manipulation in the way it calculates the golden rule; a process which they said needs to be changed.

Mr Hiller predicts the revenue shortfall is likely to be met by rises in employee National Insurance contributions alongside other tax increases.

"We don't expect this tax issue to be addressed in the Pre-Budget Report," he explains.

"It's more likely the Treasury will stick with borrowing numbers similar to those outlined in the March Budget, hoping revenues from corporation tax and income tax increase."

"But by this time next year, after the election, when deterioration in tax flows is clearer, measures will have to come in to address the revenue shortfalls. Taxes are going up: but not yet."

The economists have made their feelings known to the Treasury which insists it is right in its projections and methodology behind the golden rule.

"Our strict fiscal rules, including the golden rule will be met and our spending plans until 2008 are fully affordable," said a spokesman.

It later added the method behind the policy, which involves calculating deficits and surpluses as a percentage of national income rather than in billions of pounds, had been backed by the Institute for Fiscal Studies.

The IFS says the golden rule will just about be met but predicts tax rises of £10bn a year will be needed to ensure the rule is met in the next economic cycle.

 

1st November 2004

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