Mr Brown: May have to "increase taxes or tighten spending"

Accountancy firm PricewaterhouseCoopers says this is despite its prediction that the UK economy will grow by an average 2.75% in 2004 and 2005.

Its findings raise the question whether Chancellor Gordon Brown will have to raise taxes or lower public spending.

He may have to break his "golden rule" of borrowing only to invest, it says.

The PricewaterhouseCoopers report said it was "touch and go" whether the rule would be broken, despite the latest edition of its four-monthly UK Economic Outlook report envisages growth accelerating from 2.3% in 2003.

'Fiscal tightening'

And it says the government could begin the next economic cycle - post 2006 - with a "significant budget deficit" which would only fall if growth in public spending remained at the moderate rate mentioned in the last pre-budget report.

"Eventually the chancellor is likely to have to either increase taxes or tighten spending more sharply than indicated in the pre-budget report," said John Hawksworth, head of macroeconomics at PWC.

"There is no immediate crisis in the public finances that requires remedial action in the 2004 Budget, but some bias towards fiscal tightening might be desirable now that UK growth has moved back above trend."

The main reasons PWC gives for differing with the Treasury's budget deficit predictions is that it projects both less economic growth and higher public spending over the next two years to rebuild public reserves and increased borrowing to pay debt interest payments.