GORDON Brown may have to raise VAT to fund the government’s huge programme of spending on public services, a financial expert warned in Manchester.

Andrew Dilnot, the director of the Institute for Fiscal Studies, said taxes may have to rise to fulfil public expectations on health, education and transport because it will be a struggle to meet them at current spending levels.

Mr Dilnot told businessmen: ‘‘I think the Chancellor may feel the time has come in his pre-Budget report to soften up the public and say that if we want things, we will have to pay for them.

‘‘He cannot increase petrol taxes, or tobacco taxes because of the smuggling problem.

‘‘I think he is pretty wary of another big hit on the corporate sector.

‘‘There was a fairly big hit in the last Parliament, but people had seen it coming. Things were good, so they were prepared to tolerate it.

‘‘He has promised not to increase income tax rates and a rise in national insurance contributions would be embarrassing.

‘‘I think a VAT increase is not inconceivable.’’

Tax rises

Taxes rather than public sector borrowing are likely to rise, said Mr Dilnot.

‘‘By 2003-4, borrowing will be as high as Gordon Brown is prepared to go.’’

Mr Dilnot spoke at a meeting organised in a city centre restaurant by global recruitment firm Heidrick and Struggles. The debate was chaired by BBC TV presenter Martin Henfield.

Hours earlier, the institute published a report warning the Chancellor may have to find up to £3.8bn to pay for a clutch of new tax credits he is planning for children, low-paid workers and pensioners.

Tax rates in Britain are much lower than those in countries such as France, Germany and the US, said Mr Dilnot.

‘‘If we had their rates we could double our spending on health, education and transport and still have something left over,’’ he said.

Conflicts

The war on terrorism may, itself, precipitate tax hikes, he warned. ‘‘Whenever there is a conflict, taxes are raised. They don’t always seem to go down afterwards,’’ he said.

Mr Dilnot said no-one could predict how the economy will develop. ‘‘None of us know how bad the economy will be. It’s pretty nasty in the USA. Consumer confidence has gone through the floor.

‘‘In the third quarter, the US economy shrank by 0.4 per cent. It’s now going to be worse than we expected in the short term.

‘‘How can Britain respond? It’s tough. It’s all about confidence. Business confidence has been falling, but consumer confidence has held up the economy in the last two years.’’

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