Treasury 'faces £9bn tax shortfall'

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The worsening state of the public finances means the extra burden is needed to prevent the Treasury breaching its rule of borrowing only to invest, the National Institute of Economic and Social Research (NIESR) said.

The gloomy prediction follows warnings from the Institute for Fiscal Studies on Wednesday that the Government needed to raise an extra £8 billion in tax.

The NIESR report was seized on by the Conservatives, who claimed that £9 billion extra would mean a £360 tax hike for every family in the UK.

Shadow chief secretary to the Treasury Philip Hammond accused Prime Minister Gordon Brown of "economic incompetence" during his ten years as Chancellor. He said: "Reckless borrowing has created a £9 billion black hole in the public finances."

The NIESR report said: "The state of the public finances after a period of strong economic growth is a worry."

In January, official figures showed net borrowing reaching £43.6 billion in the nine months to December - £11.4 billion more than at the same stage the previous year - putting Government borrowing targets under pressure as an economic slowdown leads to dwindling tax receipts.

UK growth is expected to slow to 2% this year - compared with 3.1% in 2007, as the impact of the financial crisis from last summer's credit crunch is felt, the NIESR report added. The Treasury currently predicts growth of between 2% and 2.5%.

Households and businesses will come under increased pressure as credit becomes more expensive and scarce following the freeze, the report warns.

Inflation is expected to peak at 2.6% in the summer - well above the Bank of England's 2% target - as higher transport costs and soaring energy bills take effect, before the economic slowdown brings prices back into check.