Chancellor Gordon Brown has been warned by the International Monetary Fund (IMF) that he risks breaking his own rules on government borrowing.
Will Gordon Brown break his own rule?
In its annual assessment of the British economy, the IMF said the government needed to cut its spending deficit.
The IMF also said that further interest rate rises were needed to prevent a crash in the housing market.
But it praised the UK's economy for performing "enviably" while other major economies have struggled.
In the recent pre-Budget report, Mr Brown raised his borrowing estimate for 2003/04 from £27bn to £37bn.
The IMF noted that the rise was partly due to the cost of the war in Iraq, and that borrowing had helped to boost the economy during the recent economic slowdown.
But it said Mr Brown needed to take action to improve public finances in future years if he wanted to cut the risk of breaking his 'golden rule'.
The rule states that the government should only borrow to invest over the economic cycle.
Higher interest rates will prevent a house price crash, the IMF says
Earlier in the week, the ITEM Club economic think tank said Mr Brown would have raise taxes in the next couple of years to meet the rule, based on predictions it had made using the Treasury's own economic model.
The IMF said that while the pre-Budget report assumed public finances would improve over the coming years without major policy changes, it saw "significant risks" to the projections.
It recommended that the government should moderate "the growth of spending in areas where current plans involve sharp increases."
Rate rises 'needed'
The IMF also said that further rises in interest rates may be needed in order to keep the housing market under control and prevent a crash.
"A gradual but early tightening of monetary policy is the best means for achieving a soft landing in consumption and the housing market," the IMF said.
The Bank of England raised rates by a quarter percentage point to 3.75% in November, and some economists are expecting rates to rise further early next year.
The IMF added that a housing market crash posed the main risk to Britain's future growth prospects.
The IMF is predicting that the UK economy will grow 3% in 2004, before "settling down" to the trend rate of slightly above 2.5%.
The pre-Budget report forecast growth of between 3% and 3.5% in 2004 and 2005.
Despite the warning's over borrowing, the IMF noted that Britain's economy had been performing well with "resilient" growth and low unemployment.
It also noted that inflation had stayed close to its target level.
"In the face of sizeable global shocks over the last few years, the performance of the UK economy, supported by stimulative macroeconomic policies, has been enviable," the IMF said.
Shadow chancellor Oliver Letwin said the IMF report showed Mr Brown would have to raise taxes to get public finances back in order.
"The IMF believes he needs to take action in the 2004 Budget," he said.
"I am afraid I do not believe that Gordon Brown intends to let the nation's electors realise that he intends to raise taxes until after the next election."
But the Treasury spokesman for the Liberal Democrats, Vincent Cable, said the government should not rush into any changes.
"I think it is a bit premature to call for tax increases or cuts in public services," he said.
"The chancellor is right to say that we have to wait to see how the Budget position evolves over the full economic cycle.
"We should not be panicked by the IMF into early tax increases or expenditure cuts, which would be damaging in the short term."