Gordon Brown needs to raise taxes by £2.5 billion

British Finance Minister Gordon Brown will have to raise taxes by £2.5 billion to get the nation's finances back in order, the Institute for Fiscal Studies said yesterday, less than it predicted a year ago.

Last year's IFS/Morgan Stanley "Green Budget" forecast Mr Brown would need to raise taxes or cut spending by £11 to £13 billion while this year's report again noted risks of the minister missing his fiscal rules and growth disappointing.

The 2006 Green Budget took note of tax hikes worth some three billion pounds in Mr Brown's December pre-budget report (PBR), largely on North Sea oil company profits, as well as projections of future spending falling by some £8.5 billion.

"Public finance forecasts in the last four pre-budget reports have been over-optimistic," said the IFS's research, prepared ahead of Mr Brown's first budget since last May's election when Labour won an historic third straight term.

"We see a reasonable case for a further £2.5 billion tax increase. More would be needed if the Chancellor decides to cut spending less aggressively," the report said.

Mr Brown, who is widely expected to succeed Prime Minister Tony Blair, would probably break his fiscal golden rule by "an economically insignificant" £700 million and not leave £12.8 billion to spare as the PBR implied, the IFS said.

The findings may be embarrassing for Brown as they come just a day after the European Union said he needs to rein in borrowing, now running above the EU's ceiling of three per cent of gross domestic product.

Brown's own golden rule states he may borrow only to invest over the economic cycle - a cycle which the Treasury redefined late last year to stretch over 12 years, from 1997-98 through 2008-09 and which gave the Chancellor more room for manoeuvre.

The think-tank reiterated that re-dating the cycle has made it easier for Mr Brown to meet his fiscal golden rule. It also said Mr Brown has a 44 per cent chance of breaking his other rule, which is to keep net debt under 40 per cent of GDP.