Tax burden risks economic harm, Brown is warned

By SAM FLEMING and JAMES CHAPMAN

Last updated at 00:17 21 December 2006


The soaring burden of tax under Labour risks

damaging the economy and extravagant public spending should be reined in, the world’s top economic watchdog has warned.

The International Monetary Fund said that coupled with rising inflation and what is likely to be a 'permanent' increase in energy prices, family finances face a squeeze over the coming months.

Adding to the gloomy outlook, there is a 'sizeable' threat of further increases in world interest rates, which could provoke a

slump in the property market.

Overall, however, the organisation said that Britain's economic performance remains 'impressive' thanks to rising employment and 'generally strong' household finances. But there was a separate headache for Gordon Brown as public finance figures put his Budget forecasts under pressure.

Opposition MPs and tax experts claimed that either drastic cuts in spending on schools

and hospitals or significant tax rises were on the way. Official figures show the overall deficit on Britain's public finances hit

£7.7 billion last month.

The figure was an improvement on November 2005, but took the shortfall for the fiscal year since

April to £16.1bn. Shadow Chancellor George Osborne said: "These figures are the last Christmas present the public needed from

Gordon Brown. They show the public

finances are in a mess – and families are

going to pay the price in the New Year."

Mr Osborne also attacked the Chancellor as 'the king of spin', claiming the Treasury had issued six separate damaging reports in an attempt to 'bury bad news'.

They included a critical report from Mr Brown's task force on energy efficiency, a review of the Treasury's own performance, which showed it failing on key measures, and the HMRC annual report which mentioned ongoing problems in the tax credits system.

Maurice Fitzpatrick, of accountants Grant Thornton, predicted the Chancellor was on course for a £4 billion spending overshoot this financial

year.

"Possible tax rises are on the

agenda," he added.

He also warned that thousands more taxpayers will be sucked into the income tax net because of Mr

Brown's refusal to raise thresholds in line with increasing earnings.

The Chancellor will rake in an extra £5.6 billion next year - equivalent to a rise of almost 1p on income tax.

This is because of the process known as 'fiscal drag', whereby increases in earnings automatically

push people into higher tax bands.

The assessments come at a hugely sensitive time for Mr Brown, who is relying heavily on his economic record to burnish his credentials to

become the next Prime Minister.

But the IMF said that having presided over a huge expansion in the size of the welfare state, the

Chancellor will have to impose a draconian crackdown on public spending if he is to avoid further tax rises.

The burden of taxation in the economy has already risen under Mr Brown to the levels last seen in the late 1980s. Britain last year saw the

European Union’s biggest tax rises.

'Further tax increases would risk adversely affecting incentives to work and invest,' the IMF report warned.

On top of that 'energy prices (are) now expected to be permanently higher than they were a couple of years ago', and this will force firms to

rebuild their profits by resisting calls for higher salaries.

As a result, slow growth of wages is 'inescapable', the IMF warned.

Recent rises in unemployment rates due to rising immigration should be 'temporary' as the new entrants into the country are absorbed in the the

labour force, the IMF predicted.

A Treasury spokesman said: "As the IMF highlight in their statement, macroeconomic performance in the UK remains impressive and the UK is well placed to benefit from the opportunities of globalisation.

"This fits with the facts in the UK of strong economic growth, now for a record 57 consecutive economic quarters, while inflation is low, with

employment at record levels, all together ensuring that people are on average much better off than in 1997."

He dismissed the Tory claim of an attempt to 'bury bad news' as 'absurd', saying most of the reports Mr Osborne highlighted had actually

been published earlier in the week.

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