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Extra tax increases totalling £20 billion a year may be necessary to reinvigorate public finances, according to the Institute for Fiscal Studies (IFS), which has also voiced its support for the current reduction in VAT.
According to the organisation's latest Green Budget report, the Government (or its successor) will need to instigate by the end of the next Parliament rises beyond those already planned or make spending cuts to the same value, if recovery aims set out in the Pre-Budget Report are to be effective.
The document - complied for the IFS by financial services giant Morgan Stanley - does not expect tax revenues to grow over the next few years as strongly as the Treasury hopes.
The department signalled in the PBR spending cuts and tax increases starting in 2010-11 and raising 2.6% of national income (£38 billion a year) by 2015-16.
In the absence of additional spending cuts or tax increases, the Green Budget forecasts that the Treasury would have to borrow 1.5% more of national income in 2015-16 than it predicted at PBR time, even if the economy performs no worse than expected.
This would take public sector net debt above 60% of national income, from where it would decline only very gradually over subsequent decades.
Given the squeeze on spending already planned, the Government may be more likely to address any emerging revenue shortfall through tax increases, argues the Green Budget.
It goes on to note that tax increases announced in the PBR were only one-tenth the size of those announced in 1993, the last time a government responded to a similar need for additional fiscal tightening.
One option to help close the gap, says the report, would be to broaden the unusually narrow base of VAT in the UK, by removing zero and reduced rates. This would improve economic efficiency and provide enough revenue to cut borrowing by more than £10 billion, even after increasing benefits and tax credits sufficiently to leave poorer families on average better off overall.
The Green Budget - which also discusses various other issues in tax reform raised by the PBR, including proposals for better aligning income tax and National Insurance, the taxation of foreign profits, and the delay in increasing the small companies' corporation tax rate - argues that the temporary cut in VAT currently in place will be a more effective stimulus measure than its critics suggest, but deepening it would not be practical, and extending it would not be sensible.
