Bank Of England Chief Sounds Tax Warning

by Robert Lee, Tax-News.com, London

12 August 2005

Mervyn King, governor of the Bank of England, believes that pressure remains on Chancellor of the Exchequer Gordon Brown to raise income tax despite a recent reinterpretation of economic data that suggests Brown has more fiscal leeway than previously thought.

Addressing a news conference at the launch of the Inflation Report, Mr King stated that tax revenues need to rise by 2% of national income for the Treasury's fiscal rules to be met. However, it has been suggested by many economists that the only way Brown will achieve this is by raising rates of taxation.

Addressing the Treasury select committee last month, Gordon Brown told MPs that recent amendments to economic data by the Office for National Statistics suggest the current economic cycle began in 1997 - two years earlier than the date upon which the Chancellor based his fiscal policies.

As a result, Brown believes that he has a great deal more leeway to borrow to finance public expenditure, averting the need for the Chancellor to raise taxes in order to stick to his self-imposed 'Golden Rule' - that is, borrowing only to finance new investment in public services rather than to pay for day-to-day expenditure.

According to Brown, the combined budget surplus in the additional two years of the economic cycle means that he has a buffer of £12 to £15 billion (US$21 billion to US$27 billion) in his spending and borrowing plans.

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