Brown must raise taxes after miscalculation, report says

The Government will have to raise taxes to fill a £25bn black hole in its public finances, one of the country's leading economic think-tanks warned today. But the Chancellor of the Exchequer Gordon Brown will be able to use his fiscal rules to justify delaying the rise until after a likely General Election in 2005, the National Institute of Economic and Social Research said.

NIESR said slower economic growth meant tax revenues would disappoint Gordon Brown's forecasts and force him to borrow more to fund the government's multi-billion pound spending plans.

Martin Weale, NIESR's director, said: "If he wants the levels of spending he is projecting then taxes have to increase to pay for it. The question is simply when they go up."

Mr Weale said because the economic cycle - a key element of the Government's fiscal rules - is likely to end next year, the Treasury will be able to claim it has balanced the books over the cycle because of the £50bn surplus it amassed in the late 90s. But it means he will begin a new cycle with three years of deficits worth almost £40bn a year. "The Chancellor may be determined to argue he is right and everyone else is wrong right up to the election," Mr Weale said.

The report comes after official figures showed tax revenues are falling short of targets and the Treasury's own survey of economists that showed the City has no faith in Mr Brown's forecasts for growth or public spending.

The institute believes borrowing will be £34bn next year, £10bn more than the Treasury's forecast, and peak in the following year at £40bn. This would put the UK in breach of the European stability and growth pact.

The institute slashed its estimate for economic growth this year to 1.9 per cent because of the slowdown in consumer spending and the housing market.