The Treasury denies its "golden rule" is about to be broken

Revenues will be �6bn below estimates by the end of the tax year despite the economy growing in line with forecasts, accountancy firm Ernst & Young said.

That will lead to tax increases after the next elections, the firm said.

The golden rule states that the government may only borrow to invest over the course of an economic cycle.

The claims were made by the Item Club, an economic forecasting group sponsored by Ernst & Young.

What is the 'Golden Rule' It is one of a number of rules that govern how much the government can borrow, and for what purpose It means the government can only borrow to finance investment, and not to fund day to day - or "current" - spending Adherence to the rule is judged on whether the current budget is in surplus, averaged out over the economic cycle as a whole The current economic cycle is expected to end in 2006

The club said its findings were particularly disappointing given the strength of the "cyclical economic upturn, which would normally be expected to give tax revenues a big boost".

Tax revenues, though likely to pick-up in the second half of the financial year, have so far not met forecasts, it said.

"This can only mean tax increases very soon after the next election."

The Item Club pointed out, however, that its estimate of the shortfall in taxes was only half of that seen during the past two financial years.

Strong position

The Treasury denied that the Chancellor was on his way to breaking his golden rule.

"The government remains on track to meet its strict fiscal rules and has set out spending plans to 2008 that are fully affordable," a Treasury spokesman said.

"We would remain on track to continue to meet the golden rule beyond the current cycle."

Despite criticising the Chancellor, the Item Club admitted that the UK economy was "firing on all cylinders", despite record high oil prices.

"The second quarter GDP figures showed the economy continuing to rebalance nicely," said Peter Spencer of the Item club.

Should crude oil remain around the $50 mark, then 0.5% would be knocked off UK growth next year, the Club said, but added that this would still leave the economy expanding at a comfortable rate.

"This is a major contrast with the 1970s, when a similar type of shock would have knocked the UK economy for six."

However, the Item Club reduced its forecast for economic growth in 2005 from 3.0% to 2.85%.

Property stable

Ernst & Young also had some comforting words for homeowners.

It said the possibility of a major housing market crash in the UK was "remote".

The Item Club dismissed recent suggestions of a 20% or even 40% plunge in house prices and said gloomy forecasts will turn out to be wide of the mark.

"After all, inflation and interest rates remain at a historically low figures and as our summer forecast confirmed, we are close to full employment in the UK", Mr Spencer said.

The study said house prices would rise by 1.3% in 2005 and fall a touch in 2006, returning to "healthy growth" in the medium term.