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Last Updated: Friday, 5 November, 2004, 00:00 GMT
Brown may miss target, PwC says
Gordon Brown
Gordon Brown says the government will meet its fiscal targets
Chancellor Gordon Brown is in danger of breaking his 'golden economic rule', a new study has concluded.

PriceWaterhouseCoopers(PwC) said Mr Brown may miss the key target on public borrowing because tax revenues would not meet Treasury forecasts.

The golden rule says the government may only borrow to invest, not finance its spending plans, over an economic cycle.

PwC believes taxes may have to rise by at least 7bn to cut the budget deficit unless spending is reduced after 2007.

No crisis

PwC is the latest in a growing number of economic forecasters who have cast doubt on the Chancellor's ability to adhere to the golden rule.

Taxes are likely to be increased or public spending curtailed
John Hawksworth, PwC

Last month Ernst & Young said that tax revenues would be 6bn below government estimates despite the economy growing in line with forecasts.

In its latest study of the UK economy, PwC concludes that there is no "immediate crisis" in the public finances.

However, it says that corporate tax receipts are likely to be significantly lower than the Treasury is currently forecasting.

As a result, it says the Chancellor may narrowly miss his golden rule over the current economic cycle ending in 2005/6.

"Our analysis suggests that the Treasury's public finance forecasts are relatively optimistic, particularly in relation to corporate tax receipts," said John Hawksworth, PwC's head of macroeconomics.

Action needed

The Treasury has repeatedly said that the government is on track to meet its fiscal rules and that spending plans laid out until 2008 are fully affordable.

What is the 'Golden Rule'
It is one of a number of rules that govern how much the government can borrow, and for what purpose
It means the government can only borrow to finance investment, and not to fund day to day - or "current" - spending
Adherence to the rule is judged on whether the current budget is in surplus, averaged out over the economic cycle as a whole
The current economic cycle is expected to end in 2006

PwC is forecasting that government borrowing will increase to around 40bn in 2005/6.

Its verdict contrasts with Treasury projections which assume a fall in borrowing to 31bn.

According to PwC, the government will need to take action during the next Parliament to reduce the UK's budget deficit.

This will require a significant reduction in public spending after 2007/8 or a major increase in the tax burden, it says.

According to PwC's current projections, the government will have to raise between 7bn and 11bn in taxes unless it cuts spending.

"Eventually, taxes are likely to be increased or public spending curtailed," Mr Hawksworth added.

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