Tax, national insurance, stamp duty, VAT ... something will have to go up

Melanie Bien looks at Gordon Brown's options as he tries to fill the £10bn hole in his finances

Taxpayers up and down the country may be hoping that fatherhood will soften Gordon Brown and make him more lenient in his Pre-Budget Report (PBR). But the chances of this happening are slim. When the Chancellor finally releases his PBR next month, or as some are predicting, in December, he will have to address the problem of filling the £10bn shortfall in his finances.

The rumour mongers have already been busy. Last weekend, stories were circulating that the Chancellor is planning to introduce capital gains tax (CGT) on the profits of the sale of people's primary homes - a claim vociferously denied by Tony Blair last Thursday. At the moment, CGT is payable only on profits made on the sale of second homes or buy-to-let investment properties - at a rate of 40 per cent.

But even if Mr Brown doesn't introduce such a politically suicidal tax, he still has to raise cash from somewhere. "If he needs serious money, then there are three taxes the Chancellor can usually call upon: income tax, national insurance and VAT," says John Whiting of accountants PriceWaterhouseCoopers.

But Mr Brown's hands are tied to a certain extent. Raising income tax is out of the question; the Government promised in its election manifesto that it wouldn't do this.

The last time he needed to raise money, the Chancellor hiked national insurance contributions (NICs): in April, a 1 per cent increase for employers, employees and the self-employed was introduced.

Although it may seem too soon to put NICs up again, it is possible that the Treasury will see April's rise as softening us up for a second blow. There may be a further attempt to make taxpayers view another increase in a positive light with a promise that the revenue raised will be directly used to fund the ailing NHS.

Mike Warburton at accountants Grant Thornton believes the Chancellor could increase NICs by raising the upper earnings limit next April from £30,940 to £35,115. "Workers [affected by the rise] would be £417.50 a year worse off, so reducing their take-home pay," he says. "However, this would equate to £1bn a year in extra revenue for the Treasury."

An increase in VAT can't be ruled out either, according to tax experts. The Chancellor could argue that this would bring the UK more in line with the rest of Europe, where VAT is charged at 21 per cent compared to the UK's 17.5 per cent. Another argument in favour of raising VAT is that it hasn't been touched since 1991 when it was increased from 15 per cent.

But Mr Whiting believes the Chancellor may be put off by the fact that it will "affect the less well-off", even if a 1 per cent increase would bring in around £3.8bn a year in revenue, according to Grant Thornton's calculations.

While the Government says it is not planning to introduce CGT on first homes, housing has been a good source of income for it in the past. When Labour came to power in 1997, stamp duty raised just £675m; last year, it raked in a record £3.59bn for the Treasury's coffers. Increases in stamp duty over the years, coupled with a refusal to raise the amount at which it kicks in from £60,000, mean many first-time buyers have been sucked into paying it, while those on moderate incomes also face a sizeable bill.

Yet while the top rate of stamp duty in the UK is 4 per cent on properties costing more than £500,000, it is still one of the lowest rates in Europe. In Belgium, homebuyers pay 12.5 per cent duty on property purchases.

"While the Treasury flatly denied an intention to introduce CGT on the sale of first homes, it refused to confirm or deny an increase in stamp duty, so perhaps that is being looked at as a soft option," says Ray Boulger, senior technical manager at mortgage broker Charcol. "There hasn't been an increase in stamp duty for a couple of years now, so the Chancellor may see this as the simplest and least painful way of raising revenue."

Hopefully, Mr Brown will also use the PBR to make the long-overdue announcement on pensions reform.

He may also announce more details about the Child Trust Fund (CTF), which would sweeten the bitter pill of tax increases. The CTF will provide children born from September 2002 with a £250 lump sum to be invested in a fund that can't be accessed until the child is 18. The idea is they will then have a nest egg to put towards a deposit on their first home, university fees or a car. Low-income families will qualify for a further £250, and family and friends will be able to invest up to £1,000 a year in the fund.