Gordon Brown faces an unpalatable choice between a pre-election tax increase of up to £13bn or the loss of his reputation as a prudent guardian of the country's finances, Britain's leading tax thinktank said yesterday.
In the latest of a chorus of warnings about the sustainability of government borrowing, the Institute for Fiscal Studies said Mr Brown was being too optimistic in his forecasts for a recovery in tax revenues over the next three years.
Mr Brown is facing City predictions that he will overshoot his £37bn forecast for borrowing this year, already revised up £10bn from last year's budget. But the IFS said the bigger problem facing Number 11 was the long-term sustainability of the public finances.
The chancellor could postpone addressing the problem until after the election, likely to be held in the summer of next year, as the IFS says the crunch will really come when the current economic cycle ends late next year. But delaying closing the gap risked the reputation of his much-vaunted rules for running the public finances.
"He would be well advised to act promptly to safeguard the credibility of his fiscal rules," said Robert Chote, director of the IFS. "That would be prudence with a purpose."
Mr Brown will start the next economic cycle with an £11bn shortfall between tax receipts and current spending, according to the IFS, putting him in breach of his "golden rule" to borrow only for investment purposes. To meet the rule with the same safety margin built into last year's budget forecasts would require tax increases or spending cuts of around £13bn, the IFS said.
The institute's annual assessment of the public finances is the latest in a series of warnings from independent forecasters that Mr Brown may be overestimating the robustness of the Treasury's coffers.
While Mr Brown will narrowly escape a breach of the golden rule in the current cycle, the Institute for Fiscal Studies said the Treasury's tax take as a share of national income over the next three years was unlikely to be realised. Even with the tight spending plans Mr Brown is expected to announce this summer, the deficit would remain higher than the Treasury was predicting.
In Brussels the European commission sounded the alarm over the size of the UK budget deficit, warning that it was on course to breach the rules of the EU's tattered stability and growth pact this year for the first time.
Assessing Britain's readiness to join the euro between now and 2009, the commission forecast that the government would run a deficit of 3.3% of gross domestic product this year, well above the 3% ceiling stipulated in the pact. "There is a clear risk of an excessive deficit, which may have already occurred in 2003," it said.
Although the commission acknowledged that the UK deficit was likely to fall back under 3% after this year, it said the risk of it breaching the pact again would remain worrying.
