2.5 billion tax hike needed to balance budget
Gordon Brown will need to raise taxes by a further £2.5 billion to balance the public books over the economic cycle, says a new report from the Institute for Fiscal Studies.
The report, compiled in association with Morgan Stanley, says the Treasury is wrong to expect that higher revenues from existing taxes, combined with planned cuts in public spending, will swing the budget balance from deficit to a surplus.
"The Treasury believes that the economy is running 1.4% below potential this year and that half the swing from deficit to surplus will occur automatically as growth rebounds," says the report. "Most independent economists believe that the economy is closer to full capacity, in which case the structural deficit would be deeper than the Treasury thinks."
According to IFS forecasts, the budget deficit in 2006-07 it is likely to be almost £3 billion bigger than the Treasury expects. The Institute expects the gap between its own forecast and the Treasury's to widen to 0.5% of national income by 2008-09 and then to narrow to 0.2% of national income by 2010-11.
The implication is that over a 12-year economic cycle ending in 2008-09, Mr Brown is likely to break his Golden Rule - which states that the government should only borrow to invest on average over the economic cycle.