The International Monetary Fund (IMF) warned Chancellor Gordon Brown last night that he must rein in public spending or face the prospect of putting up taxes.
In its latest health check on the British economy, the world financial watchdog said that public finances had deteriorated sharply during the past five years.
It also said that the Treasury's predictions that tax revenues would pick up appeared to be "somewhat more optimistic than warranted".
It warned that Mr Brown could be forced to make a fiscal adjustment - cutting spending or raising taxes - if he is to carry on meeting his rules on managing the public finances.
It said a reduction in public spending would be less damaging to the economy than putting up taxes.
The Chancellor, in Brussels for a meeting of EU finance ministers, rejected the IMF's advice, and defended his policy of investment in public services.
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