Brown needs further £2.5bn in taxes, says thinktank

Gordon Brown is likely to have to raise taxes by a further £2.5bn to ensure his golden rule for the public finances is met, the influential Institute for Fiscal Studies said yesterday.

Releasing its annual "green budget", the IFS accused Mr Brown of being continuously over-optimistic on his forecasts for economic growth and government borrowing. It said the economy was likely to grow more slowly than the chancellor has assumed in the coming years.

Its estimate of the tax rises needed was much lower than the £11bn-13bn figure it gave in last year's green budget but only because Mr Brown raised taxes by £3bn a year, mainly on oil companies, in his December pre-budget report and projected a slower rate of public spending growth, which would save about £8.5bn a year.

Mr Brown will deliver his next full budget in March against a background of sluggish economic growth and continuing large deficits in the public finances. On Tuesday he was criticised by the cross-party Treasury select committee for his over-optimism on tax revenues in recent years and for last year changing the dates of the economic cycle on which his golden rule is based. The rule states that government spending should be covered by tax receipts over a cycle with borrowing only to cover public investment.

The IFS was also critical of changes to the timing of the cycle, which pushed out the possible end date to 2008/09, making it easier for the chancellor to meet the rule. "This has helped undermine the credibility of the fiscal framework and strengthened the case for reform," it said.

IFS head Robert Chote said the IFS projections, carried out with investment bank Morgan Stanley, suggested Mr Brown would break the rule by an economically insignificant £700m, though that is considerably worse than the £13bn to spare that the IFS says the pre-budget report forecast. "The economy is unlikely to grow as quickly as the Treasury hopes over the next two to three years, which would reduce the rebound in tax revenues and increase government borrowing even further," said the green budget.

The Conservatives jumped on the report. "Gordon Brown borrowed in a boom, and now finds himself under pressure to raise taxes in a slowdown and cut spending. This is bad fiscal management which even the chancellor's manipulation of the fiscal rules cannot hide," said shadow chancellor George Osborne.

The Treasury disagreed: "The government's spending plans are fully affordable on the basis of cautious assumptions and decisions already made. With the public finances continuing to strengthen, and as set out by the chancellor in last month's pre-budget report, the government is meeting its golden rule with a margin of £16bn," said a spokesman.

The IFS added that Mr Brown might be hard pushed to reduce spending growth as he hoped, requiring further tax rises. Its figures showed that if the government continued to pump money into health, education and overseas aid at current rates, spending growth in other areas would have to grow by only 0.8% a year, compared with an average of nearly 4% a year since Labour came to power.