Brown hits back at EC as think-tank cites £7bn tax rise as

Gordon Brown's economic strategy suffered a two-front attack yesterday when a think-tank warned that taxes might have to raised by £7bn, and the European Commission expressed concern about Britain's budget deficit.

The Treasury hit back hard at Brussels and the Chancellor will urge EU finance ministers to reject the criticism when they meet on 12 February. Mr Brown believes Brussels has made a narrow and legalistic interpretation of the EU's rules.

A Treasury spokesman said: "We don't accept that our deficit payments are not consistent with the [EU's] stability and growth pact. Our plans to borrow to invest are consistent with a prudent interpretation of the pact which takes account of the economic cycle, sustainability and the important role of public investment."

Downing Street added: "We make no apologies whatsoever for increasing investment in the public services. We believe our plans are affordable and based on prudent and cautious assumptions." In the EC's annual assessment of British economic performance, the Commission conceded that Britain's slide into a small deficit was "as a result of redressing the very low level of public sector investment, which is close to the lowest in the EU". British public finances could be stronger than expected and Britain was well-placed to deal with an ageing population.

The think-tank, the independent Institute for Fiscal Studies (IFS) said the £7bn tax rise would have to be in the April Budget if Mr Brown wanted to meet the Government's targets to improve schools and hospitals. The IFS said the economic slowdown and rising public spending meant the Government would come close to breaking its "golden rules" for the public finances. It said Mr Brown would have to hike taxes by £5bn just to maintain growth in spending of 2.5 per cent a year beyond 2004.

The Government will publish its spending plans for 2004/05 and 2005/06 in July's comprehensive spending review. If Mr Brown increases spending by 2.5 per cent a year, in line with UK economic growth, he would not need further tax rises, the IFS added.