Chancellor Gordon Brown is facing an increasingly difficult task in paying for the cost of the war on international terrorism without increasing taxes or borrowing.
This week he pledged not to increase income tax or public sector borrowing. But financial experts and senior MPs believe he may have no choice.
Treasury officials now admit in private that following the 11 September atrocities in America, the British economy will grow at only 1.5% this year compared to the chancellor’s prediction of 2.25%.
David Hinchliffe, chairman of the health select committee, and his counterparts on the Treasury and education committees, Barry Sheerman and John McFall, have all warned tax rises may be unavoidable.
But Brown has stood firm, saying: ‘I will rule out a rise in the basic or top rate of income tax. We must pay the bills necessary. There is no question of me borrowing more now.’
He promised financial discipline and that he would go head with his public spending plans.
Brown and his chief Treasury secretary Andrew Smith have a number of options. Initially they can use money in Ministry of Defence reserves – boosted by an Pounds 150m underspend in the last financial year.
The next option is Pounds 2bn plus in the ‘contingency reserve fund’ although Smith admitted this had been hit by the foot-and-mouth epidemic. Money could also be moved from year to year of the MoD’s spending programme.
Cash can be moved from other departments to help the MoD, initially from underspend, but cutting services is probably inevitable.
It is thought that three months of military action in Kosovo cost more than Pounds 200m. The Gulf war initially cost Pounds 2.5bn for six weeks, but contributions from nations like Japan, who supported the campaign but provided no troops, reduced the end cost to under Pounds 600m. The final resort in both world wars one and two was to issue war bonds.
While this is unlikely, the chancellor has boxed himself in and has a tough task in finding the money without breaking his promises on income tax public spending or borrowing. He may yet have to do so, but don’t be surprised if a lot of indirect taxes go up first as he tries to square the military cost circle.
Chartered accountant Maurice Fitzpatrick, head of economics at Tenon, said: ‘The chancellor is having to face up to some pretty tough facts. There is going to be a black hole in his finances and unless he wants to turn the tap off, he will have to find more from taxation.’
Brown would have missed target anyway