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Forecaster warns of tax hikes to slash UK deficit

By Russell Lynch

Taxes could rise by six pence in the pound over the next 10 years to slash public borrowing, an economic forecaster warned today.

Although cuts and a public sector pay clampdown will halve the UK's deficit over the next five years, the National Institute for Economic and Social Research (NIESR) said more action is needed to reduce borrowing to below 3% of GDP by 2020.

"We assume it is achieved through income taxes rising by an equivalent of six pence in the pound on the basic rate," NIESR said.

The basic rate of income tax is currently 20% after Gordon Brown cut the rate in one of his last acts as Chancellor in 2007.

VAT has been seen as a likely target for a tax hike after the election, although NIESR said VAT receipts would be held back by weak spending and higher saving.

The forecast followed Bank of England governor Mervyn King's reported warning that the winner of the General Election could pay the price the next time the country goes to the polls.

US economist David Hale said Mr King had confided that whoever takes power after May 6 will have to implement such severe measures to rebuild the public finances, they will find themselves out of office for a generation.

NIESR is also calling for a further tightening of the public finances equivalent to 2% of national output, saying the current debt mountain amounts to "unfair treatment of our children".

"Large government debts should exist only after wars and crises.

"After the crisis is over we have to rebuild the shock absorbers to prepare for the next one," it added.

NIESR said public sector wages would fall by almost 1% a year for the next five years, with taxes on household incomes set to rise by around 1% of GDP over the course of the next Parliament.

But its forecasts estimate the direct tax take would have to rise by around 1.25% of national output by 2020 - almost £18bn at today's prices - to begin to pay down the debts built up in the recession.

Although the UK is gradually pulling out of the slump with two successive quarters of modest growth, NIESR expects unemployment - currently 2.5 million - to peak at 2.7 million next year.

The UK economy will crawl ahead by 1% this year and 2% in 2011, it added.

Last week NIESR said UK output grew at 2% a year on average under Labour, compared with 2.2% from 1979 to 1997 under the Conservatives.

But after adjusting for population growth, it added that the country had risen to second place in the G7 ranking of national growth rates after being third between 1979 and 1997.


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