Brown: UK economy is flourishing

He called for the idea to be explicitly ruled out in the new constitution for the European Union.

He says tax is one of the UK's negotiating "red lines" - points which will not be conceded - in the negotiations on Europe's future.

Mr Brown made the comments in Brussels on his first day back to work after two weeks paternity leave.

Economic reform needed

Mr Brown told his EU colleagues that continental Europe was failing economically, while the UK was flourishing.

He argued that while tax harmonisation might be the future for a "sheltered trade bloc", it was not the way forward for EU members states in a competitive global market.

A categorical end to tax harmonisation efforts and an effective economic reform strategy were what was needed, he said.

"The road to great economic success does not lie in this cosy assumption that you can move from a single market to a single currency, to tax harmonisation in a federal fiscal policy and then a federal state," said Mr Brown.

"People have top ask themselves why it is that Europe has grown so slowly in the last few years and that the British economy has grown for every quarter of every year for the last six years, with low inflation, high employment and the ability to finance public services.

"Europe's economic reform agenda needs a new impetus."

Unanimity

Increased liberalisation would help governments cut budget deficits and get back on track with improved growth, he said.

If we were to go down both these roads, we would be back to these old assumptions that a single market through a single currency would lead to tax harmonisation and then a federal state in Europe Gordon Brown UK's tax concerns

Italy, Germany and the Netherlands were still in recession, while France is experiencing zero growth, and EU unemployment was set to increase to about 9% next year, twice the UK level.

The chancellor argued that unanimity between EU governments for all decisions on taxation was necessary for establishing popular consent and also for dealing with Europe's worldwide competitors.

While he insisted that tax harmonisation was getting less and less support in Europe, the idea still had to be laid to rest and ruled out in the new constitution.

However, a European Commission spokesman said there was no question of Brussels attempting "wholesale tax harmonisation".

Budget battle

But the draft constitution does call for EU-wide rules on tackling tax fraud across EU borders.

The spokesman insisted that this was not the same as harmonising tax rates.

But one British official said: "Reaching EU-level agreements on anything to do with taxation could be the beginning of moves towards full tax harmonisation."

During the talks, Mr Brown steered clear of disputes over French failure to comply with EU rules for running Europe's single currency.

France has avoided sanctions over its breach of eurozone budgetary constraints by vowing fresh spending cuts next year.

Interest rate rise?

French Finance Minister Francis Mer told his EU counterparts that he would set out further measures aimed at cutting his country's projected deficit for 2004 later this month.

Before leaving the UK, Mr Brown acknowledged that the Bank of England's Monetary Policy Committee might have to raise interest rates later this week after growing signs of a strengthening UK economy.

"It is important to lock in that stability. We are not going to make the mistakes that were made 10 years ago by the previous Conservative Government of failing to take the action that is necessary, whether it is on fiscal policy or whether it is the Bank of England taking its own decisions," he told BBC Radio 4's Today programme.

While in Brussels, Mr Brown was congratulated on the birth of his son John by his EU colleagues.