Brown may need to raise tax to fill '£11bn hole'

The Chancellor, Gordon Brown, will have to hike taxes by £11bn – equivalent to 3p on income tax – in the run-up to the next general election to avoid breaking his self-imposed "golden rule" that he must balance the public finances, a leading independent think-tank said yesterday.

The rises would come on top of the £8bn increase in both employers' and employees' National Insurance contributions, which will hit voters' pay packets in April.

The Institute for Fiscal Studies said the Government had been too optimistic in November's pre-Budget report (PBR) when it forecast that tax revenues, particularly from profits and bonuses in the City of London, would rebound after a sharp slowdown this year.

Rather than a shortfall of £24.5bn in 2003/04 followed by deficits of about £19bn in each of the four years in the Treasury forecast, the IFS expects shortfalls of £25bn in the first two years followed by a ballooning deficit that hits £28bn, £31bn and peaks at £35bn in 2007/08.

"We believe that the outlook for the public finances is weaker than the PBR suggested," said Robert Chote, director of the IFS. "If the golden rule is to be met going forward, then taxes would need to rise.

"Now may not be the ideal time for this, but rises cannot be delayed for too long without undermining the credibility of those very rules in which the Chancellor places such store." The IFS said that faced with a choice of cutting spending, cancelling benefit increases for the least well off or raising taxes, his record showed that Mr Brown would increase taxes.

In November's PBR the Chancellor had to admit his Budget forecasts were wrong and raised his estimates of public deficits for this fiscal year and 2003/04. But the IFS thinks even those forecasts are too optimistic on things such as corporation tax revenues and tax income related to the stock market.