Tax rises loom as economy slows to 12-year low

• Chancellor refuses spending cut as slowdown threatens tax revenue

• UK economy now growing at same rate as France and Germany

• High Street spending falls to lowest level in 22 months

Story in full THE British economy has collapsed to its lowest growth levels in 12 years - underscoring fears that Gordon Brown's run of luck has finally ended and that sharp tax rises are now inevitable.

Official figures yesterday confirmed that the UK economy is now growing at the same laggardly pace as the French and German economies which Tony Blair derided in his party conference speech on Tuesday.

The bad news was compounded by a warning that shoppers are reining-in spending - forcing high street sales into their sharpest monthly fall since records began 22 years ago.

As Labour prepared to close its annual conference in Brighton, the Office for National Statistics (ONS) confirmed that the run of economic growth which has accompanied Mr Blair's eight years in office has abruptly ended.

The economy grew at only 0.5 per cent over April, May and June, suggesting annualised growth of only 1.5 per cent - the same speed as the moribund French economy. It is less than half what Mr Brown is officially predicting for 2005.

This will lead to serious shortfalls in tax revenue - leaving a gap made even worse by the Chancellor's refusal to stem the flow of his spending bonanza at a time when borrowing is already over the official EU limit.

The figures were seized on by the Conservatives, who said this now explains why the Chancellor admitted to the International Monetary Fund (IMF) in Washington last Friday that he would have to tear up his economic forecasts later this year.

George Osborne, the shadow Chancellor, said that Mr Brown made the unofficial downgrade because he "already knew that growth was about to be revised down - to its lowest for 12 years".

The British taxpayer, he said, will be asked to make up the shortfall in tax rises - and said Britain needed "a Chancellor with his mind on the job not on inheriting the Prime Minister's crown".

The ONS said its growth downgrade was due to technical reasons, but its revision tallied with a series of economic reports suggesting higher taxes are slowing the economy - and that the black hole is growing larger.

The Centre for Economics and Business Research (CEBR) this week predicted a 5 billion tax rise in the 2006 Budget. It said the Chancellor "will be forced either to scale spending down or to raise stealth taxes".

Only on Monday, Mr Brown flatly ruled out cutting his spending - but said he still did not believe he would need to raise tax. But after spending the last two years borrowing his way out of a spending slowdown, he has already breached the Maastricht debt criteria.

The bleak outlook on the high street suggests that consumer spending - credited with single-handedly propping up the British economy in the last three years - has finally come to an end.

Much of the spending had been debt-financed, as consumers borrowed heavily against the rising value of their houses. With property prices now flat across most of the UK, consumers are tightening their purses.

The Confederation of British Industry also warned that the outlook for next month looked "equally gloomy" as shoppers continue to feel the pinch from the soaring price of petrol - two-thirds of which is due to tax.

The CEBR said the data showed that the high street slump is not only continuing, but is sharply deepening.

Normally, this would guarantee an interest cut - but this may further stoke inflation, which is being pushed up by petrol prices.

Mr Brown has until his pre-Budget report, expected in November, to say whether he will raise taxes, cut spending - or take Britain even further into debt. He indicated at the IMF meeting that his new growth range expectations were between 2 per cent and 2.5 per cent.

However, the flagging high street demand suggests that even this may be too optimistic - and that the widely-expected summer rally may not have materialised.

Global Insight, an economic forecasting house, yesterday revised its forecasts for the year to 1.7 per cent, from 1.9 per cent.

An even bleaker picture is expected for the Scottish economy, which ground to a halt in the first three months of the year and consistently underperforms that of England.

But the stock market continued to defy the economic gloom, and the FTSE100 shares index last night closed at a four-year high of 5,495 - its highest rate since August 2001.

Analysts say this shows that companies across Europe are turning out surprisingly large profits, suggesting they are in far better shape than the finances of their high-spending governments.