Every family could face 'black hole' tax bill of £1,250 a year

Published on Monday 6 April 2009 21:42

TAXPAYERS could face paying an extra £1,250 a year per family to cover the government's ballooning deficit, an independent think-tank has warned.

Ministers have to find an extra 39 billion to plug a looming black hole by 2016, and it will have to be paid by either tax rises or spending cuts, the Institute of Fiscal Studies (IFS) said.

Its report also laid bare how future generations could be shackled with debt: on current trend levels, the government's debt will rise from 42 per cent of GDP to 90 per cent by 2050.

Its warning came as Prime Minister Gordon Brown, Bank of England governor Mervyn King and Lord Turner, the chairman of the Financial Services Authority, met for credit crunch talks in Downing Street yesterday.

They agreed to push ahead with implementing the tougher banking regulation agreed at the G20 summit in London last week. Mr Brown's spokesman said: "Reform of the financial system was an urgent priority for the global economy and Britain would take the lead."

The Prime Minister will today meet lenders to discuss progress on making credit more available to householders and companies.

The talks followed the governor's recent appearance at the Treasury select committee, when he warned the UK could not afford to spend its way out of recession in the Budget.

Peter Hain, the former work and pensions secretary, yesterday reopened the debate by calling on Mr Brown to "invest now or pay the price later".

He told the BBC Radio 4's The World at One: "We are living in extraordinary times and all the ordinary rules don't really apply.

"If we don't invest now, we will pay the price later. We should be investing now to save later because, otherwise, unemployment will continue to shoot up, the burden will rise on the taxpayer and borrowing will increase."

He said the 22 April Budget should err on the "bold side".

However, the IFS warned that extra fiscal stimulus in the Budget could be "dangerous".

It said that for 39 billion to be raised without extra tax hikes, there would have to be a five-year real freeze in public spending. This could affect even favoured spending areas such as health and education. It went on: "Alternatively, were the 39 billion to be raised entirely through further tax-raising measures – thereby eliminating the need for any further spending cuts – then taxes would need to be raised by an average of 1,250 per family."

It also said extra spending could, at best, have little impact or even make matters worse.

The IFS said the growing debt ratio could mean additional stimulus would "pale into insignificance relative to the underlying weakening of the public finances. Conversely, one could argue that, because debt is going to be so much higher than previously expected, it has become more dangerous to add to it – even relatively modestly".

George Osborne, the shadow chancellor, called for restraint in the Budget.

He also said that if he became chancellor after the next election, he would review "inflexible" three-year pay deals for public servants.

"I think we need to look at these deals, because they may be very inflexible at a time when the economic conditions are changing very quickly," he said.