British Chancellor of the Exchequer Gordon Brown should raise taxes rather than rely on the Bank of England to curb growth through interest rate increases, according to a forecasting group that uses government models.

　　Britain's economy will expand 3.25 percent this year and next, the report by the ITEM Club said, predicting the bank's Monetary Policy Committee will lift its benchmark borrowing rate to 5.5 percent next year to stem inflation.

　　"Brown has stored up problems for the future by standing back and giving a green light to indiscriminate growth," said Peter Spencer, chief economic adviser to the group. The chancellor is "expecting the MPC to try and control a rampant UK economy by the sledgehammer of interest rate hikes."

　　Brown is counting on faster growth in the British economy, Europe's second largest, to lift tax receipts and curb the government's budget deficit. In March, he projected gross domestic product will expand between 3 percent and 3.5 percent this year and next, after growing 2.2 percent in 2003.

　　The government's preferred deficit measure, known as the public sector net borrowing requirement, was 34.8 billion pounds (US$61.5 billion) in the past fiscal year. That was 2.7 billion pounds less than the March budget forecast, though still almost 8 billion pounds more than Brown predicted a year ago.

　　The deficit was also the biggest since 1995. Brown should have introduced targeted increases in personal tax and excise duty last month to "sort out his public finances," Spencer said.

　　The ITEM Club predicts revenue in the current fiscal year will be about 4 billion pounds below Treasury forecasts and about 8 billion pounds shy in the following year.

　　The Oxford-based group, which is sponsored by Ernst & Young, predicted the public sector net borrowing requirement will swell to almost 40 billion pounds over the coming two years.

　　The ITEM Club's GDP forecasts suggest the British economy will expand at its quickest rate since 2000 over the next two years. The group said accelerating global economies, consumer spending and house-price growth will buoy the economy in the lead-up to the next general election, expected to be in mid-2005.

　　"The suspicion must be that this boom has been engineered for short-term political reasons, rather than long-term economic considerations," Spencer said.

　　Britain's economy expanded at the quickest annual pace in almost four years in the first quarter, growing 3 percent from a year ago after a 2.7 percent increase in the fourth quarter, government figures showed on Friday.

　　House prices grew at their quickest pace in almost 1 1/2 years, the Royal Institution of Chartered Surveyors said last week. The balance of residential property appraisers recording an increase in prices in the first quarter and those reporting a drop rose to 45 percent from 39 percent in February.

　　The central bank this month left its benchmark rate at 4 percent after quarter-point increases in November and February.

　　(Bloomberg News)