UK borrowing 'may mean tax rises'

'No need for interest rises', says ITEM

UK government borrowing is likely to outstrip Chancellor Gordon Brown's forecasts by about £10bn in the 2003 financial year, after new figures show the deteriorating state of public finances.

The government's finances were dealt a fresh blow on Monday when official figures showed the largest ever gap in September between tax revenue and spending.

The public sector net cash requirement was £8.6bn, more than £2bn above the market forecast of £6.5bn.

For first six months of the financial year, the budget deficit has already reached £22bn, nearly 80% of Mr Brown's forecast of a £27bn deficit for the whole year to March.

The deterioration has come about because government spending has risen by more than 10%, while tax revenues are only going up by 6%.

The government's budget deficit is now set to exceed 3% of the total economy, and may be the highest since the record 1993/4 deficit under Norman Lamont that led to a series of tax increases.

Sceptical forecasts

Meanwhile, economic forecasters said that the deteriorating public finances have increased the chances that the Chancellor will have to increase taxes ahead of the next General Election.

The ITEM Club, which uses the Treasury's own model of the UK economy, warned that Mr Brown may have to consider tax rises before the next election.

"Unless the Chancellor wants to break his golden rule about borrowing, he is either going to have to scale back the public spending figures or raise taxes in the run up to the next election," the report said.

The ITEM Club predicts that public sector borrowing will hit £36bn this year, nearly £10bn above Mr Brown's forecast.

Political row

For the Conservatives, Shadow Chancellor Michael Howard said on BBC Radio 4's Today programme that Mr Brown "knows that the public finances are in a mess despite 60 tax rises."

But he denied that the news would dent Conservative plans for tax cuts, saying that there was still scope for reducing wasteful government expenditure.

Ruth Kelly, financial secretary to the Treasury, denied that the government's fiscal targets were off-course, and said this would be confirmed in a few weeks when the Pre Budget Report was published.

"We are on track to meet all our spending commitments and our fiscal rules," she said.

But she hinted that there could be a tough spending round ahead.

"Fiscal discipline is absolutely central to our strategy," she added.

And she added that reports about possible taxes on capital gains in the case of house purchase were "completely without foundation."

Growth on target

However, ITEM Club report predicts that UK growth will meet the Chancellor's forecast, at 2%.

And the current account deficit, which measures the gap between saving and investment, is also set to be bigger than Mr Brown's forecast.

The ITEM club forecast also sees no need for interest rate rises in 2003.

Mr Brown has said growth would be at least 2% this year, and stronger next year.

That is better than the IMF's forecast for UK growth of just 1.7% this year. This autumn, it cut its previous estimate of 2% made in the spring.

Analysts at Capital Economics said the public sector borrowing figures looked "dreadful" at first glance but that much of the overshoot was from rapid spending growth, "which the Treasury should be able to rein in somewhat".

The real pressure on the Chancellor to raise taxes is likely to come next year, when Mr Brown's Budget arithmatic relies on "very strong acceleration" in economic growth, said Capital Economics.