Labour risks tax increase, warns IMF

The International Monetary Fund yesterday warned the government to rein in spending growth or risk having to raise taxes to get the public finances back on a sustainable footing, something the Conservatives described as "Labour's tax bombshell".

The IMF's latest World Economic Outlook also said the housing market and consumer debt mountain were risks to the economy, and gave weaker forecasts for economic growth than Gordon Brown's.

Labour has made its handling of the economy a central plank of its election campaign and yesterday's manifesto. But it has repeatedly had to rebut claims from independent economists that it needs to reduce spending growth or hike taxes to meet its self-imposed fiscal rules.

The IMF report said: "Fiscal policy has provided substantial stimulus in recent years, and steps are needed to accelerate the pace of fiscal consolidation - which is very modest in the recent budget - to meet the government's budgetary objectives over the course of the next economic cycle."

The Washington-based body, whose key decision-making committee is chaired by Mr Brown, praised the UK economy's performance as "robust" but predicted it would grow by only 2.6% this year, slower than the 3.1% of 2004 and well below the Treasury's forecast of 3-3.5%.

Mr Brown's "golden rule" says that he must balance current spending on things like wages and salaries with tax revenues over an economic cycle and only run a deficit to finance investment spending.

Economists at the Institute for Fiscal Studies say that in spite of the current large deficits, Mr Brown should just about meet the golden rule in the current cycle, which ends this year, but that taxes will soon have to rise by around £11bn a year to ensure the rule is met in the next cycle.

The IMF's deputy director of research, David Robinson, agreed: "Looking forward, our concern is that on the current stance of policy, over the next economic cycle it will be difficult for the government to meet its own fiscal rules."

Mr Brown is assuming that corporation tax revenues will surge in the next couple of years, making the government's plans for further sharp increases in health and education affordable without tax rises. The IFS and others are sceptical, however.

The Conservative leader, Michael Howard, said during a visit to Nottingham: "The IMF have confirmed if Labour win the election they will have to put up taxes. That is what all the independent economists say, that is what the Institute for Fiscal Studies have said and now the IMF have confirmed it as well. Today you have seen the IMF drop a tax bombshell on Labour."

Labour's manifesto pledged not to raise the basic or top rates of income tax in the next parliament but Tony Blair and Mr Brown yesterday refused to rule out further rises in national insurance, the method they used in 2003 to finance extra spending on the national health service.

A Labour spokesman rejected the IMF's conclusion. "The Treasury has consistently disagreed with the IMF about fiscal forecasts for the UK. The budget showed we will meet the fiscal rules on cautious assumptions. It is worth noting that these latest forecasts from the IMF do not appear to take into account the latest strong data on the public finances.

"And with an urgent need to continue to invest in education, transport and our public services, we will reject any proposals from the IMF to cut that investment."

A spokesman for the Liberal Democrats said the lack of transparency about the fiscal position made its call for independent scrutiny of the government's plans by the national audit office all the more urgent.

Labour was also hit yesterday by new figures showing unemployment had unexpectedly risen while wage growth had surged, raising the prospect of an interest rate rise next month.