More tax rises 'are inevitable'

More tax rises 'are inevitable'

Leading independent fiscal experts last night warned that Gordon Brown would be forced into fresh tax increases after the latest set of public borrowing figures showed the government deficit running at twice last year's levels.

Despite the continued VAT windfall from strong retail sales - up 0.6% last month - the Institute for Fiscal Studies said the chancellor would struggle to meet his self-imposed financial targets, as a result of higher than expected spending and weaker than anticipated tax receipts.

Data from the Office for National Statistics showed net borrowing by the state in the seven months to October was £21.1bn, compared with £10.7bn in the same period a year earlier. October, traditionally a bumper month for tax receipts, saw last year's £2.8bn surplus dwindle to one of £300m.

Christine Frayne, economist at the IFS, said: "October is usually a good month for the Treasury's bank balance. This month's figures have been depressed by the transition to the new corporation tax regime. But the public finances still look in much weaker shape than Gordon Brown projected at the time of the budget.

"The current deficit is running at almost twice last year's levels rather than falling by 30% as the chancellor predicted. Central government receipts look increasingly likely to undershoot his projections."

The chancellor insisted at the CBI conference this week that he would continue to meet his two fiscal rules:.....continued below

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that over a complete economic cycle the government should only borrow to invest and state debt as a proportion of GDP should remain below 40%.

Ms Frayne said that even if the first of the golden rules was met over the current cycle it was not clear that the chancellor could expect to continue to do so. "Certainly on the basis of current trends Mr Brown will have a tough job explaining in next month's pre-budget report how he can maintain his tentative medium-term spending plans without raising taxes again soon."

Mr Brown is optimistic that a strengthening of the economy over the coming months will lead to a narrowing of the budget deficit. The ONS said that the volume of retail sales in the three months to October was up 1.5% on the previous three months and by 3.7% on the same three months of 2002.

Release of the figures coincided with a fresh warning from Mervyn King, governor of the Bank of England, to households thinking of taking on fresh debt: "People should think carefully about how much they borrow. It is very easy to borrow in haste and repay at leisure."

City analysts believe that this month's quarter-point rise in borrowing costs is unlikely to be the last, although few expect rates will reach the levels predicted by the market.

Mr King said the Bank would proceed "cautiously and steadily" because of uncertainty about the impact of rising borrowing costs on households. "It's a bit risky to make large changes in interest rates."

But fears of a repeat of the 1990s housing market crash were overdone. "[Our] best assessment is that the position of households in aggregate is not as fragile as some have suggested," he told MPs on the Treasury select committee.

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