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Wednesday, 29 January, 2003, 18:24 GMT
UK could face 11bn budget hole
Graph of UK budget surplus or deficit
The UK government may have to raise taxes by up to 11bn a year from 2005 onwards, an independent economic think tank has warned.

Chancellor Gordon Brown can take short-term solace from the fact that the Institute for Fiscal Studies (IFS) believes he will more or less meet his borrowing targets during the next two financial years.

There is a danger of the Chancellor missing his golden budget rule

Robert Chote
IFS director
But from 2005 onwards the government may have to borrow up to 28bn a year, well above the Chancellor's current forecast of 19bn.

According to the IFS, this will bring the government into conflict with its "golden" budget rule - which states that it is ok to borrow to invest, but that any additional debt must be repaid over the economic cycle.

If the Chancellor wants to stick to his spending promises on public services like health and education, he will have to increase taxes.

Income tax rise of 4p?

Just to break even he will have to raise his tax take by at least 4bn, and possibly by up to 11bn to have a safety margin, calculate the institute's tax experts.

That is equivalent to a tax rise of between 1p and almost 4p on the basic rate of income tax .

"There is a danger of the Chancellor missing the golden rule as we go forward", said IFS director Robert Chote when he presented the institute's closely watched Green Budget, which analyses the government's fiscal options.

And if the economy grows slower than currently forecast by the Treasury, the budget shortfall could be even higher.

Gordon Brown is expected to give the details of his budget plans for 2003-04 in March.

No war impact

Military action in Iraq should not have a major impact on Mr Brown's budget calculations, the IFS experts say.

The Chancellor has already set aside 1bn to cover the costs, while a sharp economic slowdown might trigger a revenue shortfall of a further 2bn.

The figures, though, are dwarfed in a budget with tax revenues of about 400bn and spending at a similar scale.

But what will hit the budget numbers, say the IFS experts, is a dramatic shortfall in corporation tax, well below the Treasury's forecast.

Government debt

Last November, in his annual pre-Budget report, Gordon Brown admitted that the days of government surpluses would soon be over.

After paying off billions of pounds of debt over the past five years, he admitted that he would run a budget deficit for the next two years.

But Mr Brown and his officials hope that a sharp recovery of the UK economy will bring a swift turnaround in the following years.

The IFS analysts are more sceptical.

They predict that government spending will rise faster than planned, while tax revenues will grow slower than the government predicts.


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