GORDON Brown will be forced to raise taxes by at least £10 billion to tackle a persistent deterioration in the public finances, according to a leading forecasting institute.

Disappointing growth of just 2 per cent this year, prolonged weakness in consumer spending and slower increases in incomes will all hit the Treasury’s revenues in the next few years, forcing the Chancellor to raise taxes, according to the National Institute of Economic and Social Research.

The institute said that despite Mr Brown’s controversial reassessment of his “golden rule” for the nation’s finances last week, the improved picture this produced will not spare him from a requirement to raise tax.

Ray Barrell, a senior economist at the institute, said that Mr Brown would have little option but to put off higher taxes for now since, despite the worsening condition of the public finances, tax rises would add to the economy’s slowdown. But Mr Barrell said that once growth had strengthened, the chancellor would be compelled to act.

The institute’s forecasts show that the deficit on the Treasury’s current budget, which excludes investment spending and is the key measure for the golden rule, will average £10 billion in the next three financial years, against Mr Brown’s figure for an average deficit of just over £4 billion a year.

Its predictions also anticipate total government borrowing of £110 billion over this period from 2006 to 2009 — more than a third higher than the Treasury’s forecast.

Mr Barrell said that the implication was that Mr Brown will be forced to raise taxes by at least £10 billion, and perhaps as much as £40 billion, by 2008, by which time he is expected to have become Prime Minister.

An increase of £10 billion is equivalent to almost an additional 3p on income tax.

The institute said that the golden rule would continue to add to pressures for higher tax. The rule requires that all non-investment spending by the Government must be funded by taxes over an economic cycle, so that the so-called “current budget” remains in the black over this period.

On the Treasury’s view, the rule will be met over the cycle that Mr Brown now says began in 1997 and is due to end early next year. But this implies that the next cycle will then begin at a time when the current budget will be deep in the red. In turn, these deficits will have to be offset by large surpluses later in the new cycle, something which will only be achievable if taxes are raised. The institute believes that Mr Brown will have “little prospect” of meeting his rule in the new cycle.

Its forecasts see growth this year of only 2 per cent, despite expected cuts in interest rates, against Mr Brown’s forecast of 3 to 3.5 per cent. In 2006 and 2007, the institute thinks that growth will rise to 2.5 per cent. Consumer spending is expected to be weak, growing by only 1.7 per cent a year from 2005 to 2007, against its 3.6 per cent pace last year. But this will be offset by an improved trade performance as exports accelerate.

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