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£2.5 billion tax hike needed to balance budget

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27th Jan 2006
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Chancellor Gordon Brown will need to raise taxes by a further £2.5 billion to balance the public books over the economic cycle, according to the latest Green Budget by the Institute for Fiscal Studies (IFS).

The report, compiled in association with Morgan Stanley, says the Treasury is wrong to expect that higher revenues from existing taxes, combined with planned cuts in public spending, will swing the budget balance from a deficit of 0.9% of national income in 2005'06 to a surplus of 0.8% over the next five years.

"The Treasury believes that the economy is running 1.4% below potential this year and that half the swing from deficit to surplus will occur automatically as growth rebounds,' says the report. "Most independent economists believe that the economy is closer to full capacity, in which case the structural deficit would be deeper than the Treasury thinks."

According to IFS forecasts, the budget deficit in 2006'07 it is likely to be almost £3 billion bigger than the Treasury expects (0.3% of national income). The Institute expects the gap between its own forecast and the Treasury's to widen to 0.5% of national income by 2008'09 and then to narrow to 0.2% of national income by 2010'11.

The implication is that over a 12-year economic cycle ending in 2008'09, Mr Brown is likely to break his Golden Rule - which states that the government should only borrow to invest on average over the economic cycle. 'If the past forecasting performances of the Treasury and the Green Budget are a reliable guide to the future, the Treasury's forecast implies a 58% probability of meeting the rule and the Green Budget forecast a 50% probability of meeting it," says the IFS.

"In the Pre-Budget Report, the Chancellor announced a £3 billion tax increase and pencilled in a cut in public spending as a share of national income worth £8.5 billion a year in today's terms by the end of the 2007 Comprehensive Spending Review period," adds the Institute. 'We see a reasonable case for a further £2½ billion tax increase. More would be needed if the Chancellor decides to cut spending less aggressively."

The full report can be downloaded from the IFS website.

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By Simon Sweetman
31st Jan 2006 09:23

likely ?
If on the IFS figures there is a 50% chance of the golden rule being met, can you say it is not likely ??

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