Upcoming budget deficits will be way up on Alistair Darling's previous forecasts, reports have suggested.
Income tax could increase by 5p due to the recent financial turmoil, an expert has claimed.
Speaking to the Sunday Times, Ray Barrell at the National Institute of Economic and Social Research said that the tax rise could come about due to a massive increase in public spending - as the government looks to offset the lost revenue resulting from the financial sector's slump over the next few months.
Two new reports back up this point of view, with Capital Economics predicting the budget deficit to increase to £100 billion in 2010-11 - and the Centre for Economics and Business Research claiming today that borrowing will hit £90 billion for the year. As recently as March, chancellor of the exchequer Alistair Darling was predicting a deficit of around £40 billion.
The dramatic disparity between these figures testifies to the extraordinary nature of events which have taken place in the financial sector over recent days. Last Sunday, US investment bank Lehman Brothers went bankrupt due to a dramatic deterioration of its share price - with investors concerned over its ability to raise enough cash to meet its costs.
That same day, Merrill Lynch announced that it would merge with Bank of America in a £25 billion deal, while, last week, under-pressure mortgage lender HBOS merged with Lloyds TSB. The US government then announced an extraordinary £400 billion package to buy up banks' toxic assets in order to boost confidence in the financial sector.
Douglas McWiliams, the CEBR's chief executive, said: "£90 billion is a huge amount of borrowing. Although there is little room to do much about it in the short term, it will overshadow public policy for many years to come."
