Tax hike inevitable as experts question Brown's optimism

Published on 03/12/2004 02:08

TAXES are certain to rise after the general election next year, economists forecast last night, warning that Gordon Brown’s optimism would not be enough to save his reputation for financial prudence.

The Chancellor gave a relentlessly upbeat impression of Britain’s economic prospects, insisting that growth next year will be between 3 and 3.5 per cent. The Bank of England says growth will be no more than 2.5 per cent.

Healthy growth and a large injection of tax revenue from North Sea oil producers’ swollen profits will be enough to keep the public finances on course over the next few years, Treasury officials said.

Despite independent forecasters’ calculations that lower-than-expected tax receipts will land Mr Brown with 10 billion of extra borrowing, the Chancellor stated that his financial shortfall would be only slightly higher than his last estimate.

"We are both meeting our fiscal rules and able to sustain the public-spending commitments that we have made," he said.

At the Budget this year, Mr Brown forecast that borrowing this year would be 33 billion, falling to 23 billion in 2009. Yesterday, he revised those figures to 34 billion and 24 billion.

Alan Clarke, an economist at BNP Paribas in London, said that Mr Brown’s determination to stick to his upbeat forecasts meant that tax rises are now inevitable.

"With his economic forecasts largely unrevised, his fiscal arithmetic continues to be based on unrealistic assumptions," he said. "Given this and the steady deterioration in finances so far this year, we believe that taxes will need to rise after the election to make the books balance."

Treasury officials retorted that City economists have over-estimated public spending and failed to take account of big pay-outs to come from oil companies. "We have a big slug of oil money to come," said one of Mr Brown’s senior advisers.

John Hawksworth, that head of economic research at PricewaterhouseCoopers, was one of many economists to describe the fiscal outlook as essentially unchanged after the pre-Budget report from what it looked like in March.

But they say it is still in poorer shape than befits a Chancellor who made his reputation on economic prudence.

"We still think there’s going to be a 10 billion deficit in the first year of the next cycle, and therefore at the 2006 Budget he’s going to have to make some tough decisions," said Mr Hawksworth.

Mr Brown has based much of his reputation as an economic manager on his so-called Golden Rules, which commit him to borrow only to invest in public services and to balance the government’s books over the economic cycle.

The Treasury insisted yesterday that Mr Brown is on course to pay off the money he borrowed to spend on services by the end of this cycle, which is due to end some time in 2006.

Private economists said that, in reality, Mr Brown will have to decide between cutting spending or raising taxes if he wants to meet his own rules.

"The Chancellor is in serious danger of breaking his own Golden Rule to borrow only to invest over the economic cycle," said Roger Bootle, economic adviser to Deloitte & Touche. "The fact that the cycle is not due to end until 2006 means that he can put off any corrective measures until after the election. But after that, decisive action will be required to put the public finances back on a sustainable footing at the start of the next cycle."

Peter Spencer, the chief economic adviser, Ernst and Young Item Club, which uses the Treasury’s own forecasting model, also cast doubt on Mr Brown’s optimism.

"If you believe that, you’ll believe anything. It is much more likely that spending will be higher than forecast, revenues weaker and that the Golden Rule will be broken in this cycle," he said. "How does

he expect to meet the Golden Rule when, despite all the good news, the current deficit for the first seven months is even higher than it was last year?"

Michael Saunders, the chief economist at Citigroup, suggested that rather than take politically tough decisions, Mr Brown could simply give up on the Golden Rule altogether and carry his borrowing forward from one cycle to the next.

"The most likely outcome is that he will simply let the deficit stay high," he said.

Matthew Elliott, the chief executive of the TaxPayers’ Alliance, a low-tax pressure group, said: "We are convinced that taxes will rise again after the election. There is a huge black hole at the heart of the Chancellor’s tax-and-spend forecasts. This will really anger taxpayers who have already been taken for a ride by Gordon Brown. A tax revolt is looming in this country, and more and more people just want the government off their backs."

The British Chambers of Commerce also said that executives are concerned about taxes to come.

The group said in a statement: "Businesses are very concerned that unduly optimistic assumptions about tax revenues may necessitate damaging tax increases in the next two or three years, in order to meet the Chancellor’s Golden Rule."

The opposition seized on economists’ forecasts of difficulties to come for Mr Brown.

Vince Cable, the Liberal Democrats’ Treasury spokesman, taunted Mr Brown with the independent analysts’ calculation that there is a "black hole" in the public finances.

"The Chancellor says there isn’t, so who are we to believe? "There is an issue of credibility and trust," said Dr Cable.

Oliver Letwin, the shadow chancellor, mocked Mr Brown’s record as "alchemy in reverse".

He said: "The Golden Rule has turned to dross in his hands. It was meant to be a guarantee that the Chancellor would borrow only to invest. All talk - he’s borrowing to spend."

He added: "The fact is that the tide is going out on the Chancellor’s credibility. The tragedy is that the Chancellor is spending and borrowing and taxing so much because he is not getting value for taxpayers’ money."

The Conservatives, Mr Letwin said yesterday, would ease Britain’s financial worries by getting much more value out of public spending.

But Kenneth Clarke, the last Tory chancellor, had a bleak warning that applies as much to Mr Letwin as Mr Brown.

"Taxes will go up whoever wins the election unless someone is prepared to cut back on public spending," he said.