The UK Treasury may need to raise an additional �20bn in tax revenue by 2006, a leading economic think-tank has warned.

The National Institute of Economic and Social Research (NIESR) said a weak global economy and tumbling equity markets meant the Treasury was heading for a revenue shortfall in the near future.

The outlook for growth has darkened

NIESR

The NIESR has cut its economic growth forecasts for the next two years and predicts interest rates will stay on hold, unless a deeper slide in global markets sparks another cut.

"The long-term fiscal outlook is gloomy," NIESR analysts said.

'Outlook has darkened'

The NIESR uses its own economic model to publish forecasts for the UK economy every three months.

It has cut its economic growth forecast for 2002 to 1.4%, against the Treasury's official forecast of 2.0-2.5%.

The research group has also reduced the 2003 projections to 2.5%, compared with the Treasury's expectations of 3.0-3.5%.

The result could be a shortfall in tax revenues, meaning the government would need to raise taxes or borrow money to make up the deficit.

The NIESR suggested the government's current account could see a deficit of �2bn in the current year, against the Treasury's current projections of a �3bn surplus.

"The outlook for growth has darkened," said the NIESR.

Martin Weale, director of the NIESR told BBC Radio 4's Today programme:

�20bn fund raising?

The NIESR survey is the latest gloomy prediction for the UK economy.

He does look almost like the farmer who might be hanged on the expectation of plenty

Martin Weale, NIESR director

Earlier this week economic forecasters the Ernst & Young Item Club predicted that UK Chancellor Gordon Brown faced a �7bn "black hole" in public finances.

The Item Club too blamed falling equity markets and lower tax receipts from the once prospering City market.

The NIESR added that the shortfall would also mean a rise in public sector borrowing.

It predicted a �14bn deficit for 2002-03, against the government's predictions of �11bn.

"The longer-term fiscal outlook is gloomy," it warned.

"New measures are required to raise an additional �20bn of tax revenues by 2006."

Raising cash

Mr Weale told the BBC that the UK Chancellor Gordon Brown had three choices in order to "deliver the spending that he's promised".

"He can either borrow the money.....he can fudge the timing of the economic cycle...or he can put up taxes."

The survey suggested that conditions had deteriorated since the Chancellor's earlier spending pledges and had put his "prudent" reputation in danger.

"He does look almost like the farmer who might be hanged on the expectation of plenty," said Mr Weale.