The Institute for Fiscal Studies' (IFS) Green Budget warned yesterday that without the increases, the government would miss its fiscal target on public borrowing, saying the economic slowdown would reduce corporate tax revenues, widening the budget black hole.

IFS warned the government could also break its debt rule by 2010-11, BBC News reports. That rule would be breached at once if the government were forced to count its loans to the Northern Rock as part of its debt, which in turn would soar to 45% – well above the Treasury's 40% limit of total public debt as a share of GDP, or gross domestic product.

As the government started a new economic cycle with a big current deficit, it was likely to struggle to meet its 'golden rule' - balance between borrowing and spending over the whole period of ebbs and flows in growth. The IFS said that, as the economy slowed, it was facing a difficult choice. If it raised taxes, it might slow the economy further.

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