Oil boom helps Treasury top up empty tanks

Surging oil prices have boosted tax revenues in recent months to the extent that the shortfall in the government's finances is likely to be considerably smaller than previously expected, a leading economic thinktank said yesterday.

Releasing its latest quarterly review of the British and world economies, the National Institute of Economic and Social Research gave a generally upbeat view of Britain's economic prospects but was less optimistic on the US economy.

Senior research fellow Ray Barrell said that oil prices were around $10 a barrel higher than at the time the institute produced its last forecast. That had boosted tax revenues by at least £2bn in the fiscal year just ended. Given that oil prices were expected to remain high, the boost in revenues was likely to continue.

Mr Barrell said taxes would still need to rise by £7bn-£8bn a year in the next parliament to ensure that whoever was chancellor could meet the so-called golden rule imposed by the current government. That estimate was down from an £11bn-£12bn "black hole" the institute forecast in January.

The institute forecast the Bank of England would need to raise interest rates by at least another quarter of a point from the current 4.75% level to keep inflation under control. It forecast economic growth of 2.7% this year and next, with weaker consumer spending balanced by stronger exports.

It was less sure on America, arguing that there was a real possibility of a sharp slowdown coming soon.

Assessing Labour's record on running the economy over the past eight years, the institute said it was very impressed with the stability of growth and inflation and the strong rise in employment, but said low productivity and a low level of savings remained weaknesses.

Separately, the Institute for Fiscal Studies released a report suggesting that pensioners and working families would be slightly worse off under Labour in the next parliament, as money would be channelled towards single parents, whereas they would be better off under the Tories.

All groups would gain under the Conservatives' plans, with the richest third of the population benefiting the most.