Tax increases likely to plug £5bn treasury hole

A £5 billion shortfall in the UK treasury's revenue is likely to be shored up with tax rises, one of world's leading accountancy agencies has said today.

Economic forecasters, Ernst & Young Item Club, which uses a similar economic forecasting model to that used by the treasury, has said that Chancellor Gordon Brown faces the prospect of having to introduce measures that will plug a £5 billion revenue shortfall - chief among which would be the increase of tax rates.

However, what is of major concern to economic analysts is that the shortfall stems from deep-seated problems within the UK economy – most of which are not directly linked with the short-term downturn.

Around £2 billion of the £5 billion shortfall can be linked to the UK's slow rate of growth, which upped by only 1.5% compared to Mr Brown's crucial 2% benchmark.

The bulk of the shortfall is due to deeper changes in the economy. That is, less revenue is being generated from taxation of high-income taxpayers, corporation tax on companies and stamp duty on shares.

If, as looks increasing likely, company profits, top salaries, and City profits are not going to return any time soon to the levels of that experienced in the 1990s, borrowing will have to be curbed with a taxation hike.

Mr Brown has already increased taxation this year, increasing National Insurance contributions, but the Item Club warn that this will prove insufficient given the poor performance of the overall economy.

A report by the British Chamber of Commerce (BCC) revealed that the service sector had experienced a sharp decline in the last quarter with companies facing a slowdown in sales and exports. The BCC said that this had called into question the recovery and led to a drop in confidence.

(SP)