£1,250-a-year tax rise 'needed to save UK'

By James Chapman for the Daily Mail
Updated: 06:40 EDT, 7 April 2009

Families could face tax rises of £1,250 a year to plug a catastrophic black hole in the public finances, the country's most respected economic forecaster warned yesterday.

Budget measures: The Chancellor Alistair Darling may have to raise taxes.

The Institute for Fiscal Studies predicted that Government debt, already over the previous target of 40% of national income, could reach 80% or 90% by 2016 - similar to the level of Italy's 'basket case' economy.

The forecast came amid a separate warning that unemployment will peak at 3.2m in the second half of next year - meaning Gordon Brown will have to fight an election with voters still losing their jobs.

The British Chambers of Commerce said the recession would last until the end of the year, with the economy shrinking by more than 3% - its worst performance since the war.

Experts at PricewaterhouseCoopers were yesterday reported to be predicting tax rises of £800 per taxpayer to plug the hole in the nation's finances.

The £1,250 figure from the Institute for Fiscal Studies is based on a more pessimistic appraisal of the UK economy. It issued a worse-than-expected assessment of the impact of the recession, bank bailouts and increases to Government borrowing.

The IFS was ambivalent on the issue of whether the Government could mount another round of debt-funded tax cuts or spending increases.

'Any plausible additional stimulus would be likely to pale into insignificance relative to the underlying weakening of the public finances,' it added. 'Conversely, one could argue that, because debt is going to be much higher than previously expected, it has become more dangerous to add to it - even relatively modestly.'

In the grimmest possible backdrop for Chancellor Alistair Darling's Budget later this month, the IFS said the Government may have to find an extra £39bn a year by 2016 to bring borrowing under control. It said that amounted to £1,250 in higher taxes per family. Alternatively, a five-year real terms spending freeze would have to be implemented across the public finances.

An extraordinary assessment by the Royal Bank of Scotland, now 70% owned by the taxpayer, warned that something was 'rotten about the state of the public finances'.

A briefing note from the bank said: 'Fiscal policy management has been poor, with policymakers seemingly lulled into complacently assuming revenues would continue to pour in.'

It said that it could take the best part of a decade to repair the damage and get the public finances back into balance.

Treasury officials are working on plans for tax rises and spending reductions as they battle to demonstrate a credible-exit path' for the public finances.

That is seen as vital to reassure international financial markets about Britain's capacity to repay the record levels of debt.

An increase in VAT, reduced temporarily to 15%, to as high as 20% after the next election has been considered by the Treasury. The IFS forecast of a £39bn black hole in the public finances is almost twice as bad as that predicted by Mr Darling in his Pre Budget Report last November.

The Prime Minister told finance chiefs last night that reforming the economy was an 'urgent priority' following last week's G20 summit in London. Mr Brown, Mr Darling, Bank of England governor Mervyn King and Financial Services Authority chairman Lord Turner met in Downing Street to discuss the next steps.

They agreed to step up progress on directing support to sectors most affected by the global downturn, such as the car industry.

Last night it emerged that Mr Brown has failed to capitalise on the success of the G20 summit with the electorate.

A YouGov poll for The Times found that the Tory lead over Labour has widened to 13 points - killing off any prospect of an early election.

Labour is unchanged from last month on 30 points, while the Tories are up one at 43 and the LibDems down one at 18.