Britain's ruling Labour Party will probably have to raise taxes or cut spending if it wins an election expected next spring, a respected forecasting group said yesterday.
The National Institute of Economic and Social Research said Chancellor of the Exchequer Gordon Brown is in danger of breaking his fiscal Golden Rule, which states he may borrow only to invest over the economic cycle.
Mr Brown has only a 50-50 chance of meeting the Golden Rule if he declares the cycle over in March next year, NIESR said in a report that comes just weeks before the Chancellor is expected to deliver his pre-budget report to Parliament.
The odds would deteriorate further if he waited a further year to do so, it added.
"If our projections turn out to be correct it is very likely that tax rises or spending cuts will be necessary to meet the Golden Rule in the next cycle and that, if the current cycle continues to 2005/06, then the rule will be broken in this cycle," said Martin Weale, NIESR's director.
"A fiscal tightening of around one per cent of GDP is needed in order to meet the Golden Rule, if not next year then soon after," NIESR said in its October Economic Review.
While NIESR acknowledged that the deficits Britain is running are not huge, it said that given the current low level of saving compared with other European countries like France and Germany, the government should really be in surplus.
"If people don't save for themselves, the government should save for them," Mr Weale told reporters.
But the report said that prospects for the British economy are good. NIESR barely altered its forecasts for growth from last July's, shaving one tenth of a percentage point off 2004 to 3.2 per cent and adding the same amount to 2005, at 2.8 per cent.
NIESR also said the economy will probably easily weather higher oil prices, which have climbed about 70 per cent on a year, but warned again that a property market crash, with prices still some 30 per cent too high, remains the main risk.
"There is a very significant risk of house prices returning to more normal levels very rapidly," Weale told reporters. "I wouldn't bet my money on there not being a 20-30 per cent fall over the next three years," he said.