Business

Sharp tax rises needed to cut deficit says think tank

Money and a credit card
Image caption The think tank's growth projections are lower than the government's

Taxes must rise sharply over the next decade to bring down borrowing, according to the National Institute of Economic and Social Research (Niesr).

In a report, the think tank said taxes would have to rise by the equivalent of 6p on the basic income tax rate to get the budget deficit below 3% by 2020.

It also said the UK economy faces sluggish growth and rising unemployment this year.

Niesr expects growth of just 1% this year, followed by 2.25% growth in 2011.

The BBC's Nils Blythe said that although the large additional tax rises needed to get the budget deficit below 3% by 2020 would not necessarily come in the form of income tax increases, the think tank reasoned that the scale of the rise is equivalent to putting up the basic rate of income tax from 20p to 26p in the pound.

"Only with that type of increase will the national debt eventually fall below the 40% of national income that before the financial crisis was regarded as a prudent level," he said.

Growth projections

The think tank also said unemployment is likely to peak at 2.7 million in 2011, up from the current total of 2.5 million.

The growth projections are lower than those made by the government in last month's Budget.

Those projections see the economy growing by between 1% and 1.5% this year, and between 3% and 3.5% in 2011.

The think tank said cuts to public spending, which will be necessary for cutting the size of the budget deficit, will push growth lower than it otherwise would have been.

Consumer spending is expected to rise this year, but by only 0.3%.

Niesr's forecasts for the world economy as a whole are more optimistic, however.

It expects almost 4% growth globally this year, following the 1% fall in global output last year.

But it said that growth would be powered by developing economies including China, which has seen double-digit GDP growth over the last 12 months.

The recovery in the US and Canada is also likely to be stronger than in Europe, the think tank added.

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