The IMF undercut the Chancellor’s bullish view of economic prospects as it forecast that growth in 2005 will be much weaker than the Chancellor predicts, and argued that he may be forced to raise taxes or cut spending to meet his stringent budget rules.

In comments that will infuriate Mr Brown, the fund inflicted a further blow to his hopes of fostering a pre-election feel-good factor when it also renewed warnings over the risk of a housing crash and told would-be buyers to beware of dangers in the property market.

In its assessment of world prospects, the IMF pared its forecast for growth next year to 2.5 per cent, sharply lower than the 3.4 per cent growth expected this year, and much weaker than the 3 to 3.5 per cent projected for 2005 by Mr Brown.

The downgrade came as figures indicated that falls in house prices have triggered a slide in consumer confidence and high street activity. Although official data confirmed buoyant second-quarter growth of 0.9 per cent, economists said that the economy is set to slow markedly in the second half as consumers retrench and the housing market cools. If growth falls as far short of the Chancellor’s projections as the IMF expects, the knock-on consequences for the Government’s finances would mean that disappointing tax revenues would drive borrowing sharply above Mr Brown’s forecasts.

The IMF said that he should take tougher measures than he now plans to strengthen finances and ensure his self-imposed “golden rule” is met. “In 2005 and beyond, stronger fiscal consolidation than presently seems in prospect would be desirable, both from a cyclical perspective and to reduce the risk of a breach of the golden rule in future,” the IMF said.

The IMF said that the economy continues to enjoy “robust” activity, but reinforced past concerns over the risks posed by house prices, which appeared to be overvalued. It suggested that with interest rates rising and most mortgages on variable rates, the pressures on property prices could continue to grow.

Explore Economics

• Autumn Budget 2007

• Budget 2008

• World Economic Forum

• The Times MPC

Times Recommends

• Bovis and Redrow axe close to 1,000 jobs
• Irate M&S shareholders demand fresh talks
• Investors rally to B&B amid fears of contagion