Tax warning from IMF mars Blair's optimistic message

Tony Blair's attempt to cement his political legacy by unveiling a "quintessentially New Labour" manifesto was overshadowed by an untimely warning from the International Monetary Fund that Labour might have to raise taxes in a third term.

Tony Blair's attempt to cement his political legacy by unveiling a "quintessentially New Labour" manifesto was overshadowed by an untimely warning from the International Monetary Fund that Labour might have to raise taxes in a third term.

In its twice-yearly report on the British economy, the IMF said the Chancellor, Gordon Brown, needed to "accelerate the pace of fiscal consolidation" to meet his "golden rule" on tax and spending. The Tories said this confirmed that Labour would have to increase taxes or cut borrowing.

The IMF bulletin propelled tax to the top of the election agenda and put Labour on the defensive. The party's manifesto pledged it would not increase the basic or higher rate of income tax, but made no commitment on national insurance, which was raised in 2002 to boost health spending.

Last night, Mr Brown rejected the IMF's verdict: "I disagree with the IMF. They have got it wrong on the growth of our economy, they have got it wrong on the governance of our economy, they have got it wrong on jobs. I think the IMF will have to correct their figures at a later stage, as they have had to do before."

The IMF predicted that the economy would grow by 2.6 per cent this year, rather than the Chancellor's forecast of 3 to 3.5 per cent. But Labour said the IMF had always been more cautious than the Treasury.

Michael Howard, the Tory leader, said: "The IMF has dropped a tax bombshell on Labour ... I f Labour win the election they will have to put up taxes. That is what all the independent economists say, that is what the Institute of Fiscal Studies have said, and now the IMF have confirmed it"

But the Tories' ability to exploit Labour'sproblem was reduced by their own reluctance to rule out tax or national insurance increases if they win power. Mr Brown was quick to seize on that as an endorsement of his refusal to close the door to higher national insurance.

Flanked by his entire Cabinet, Mr Blair launched a 23,000-word manifesto with 277 policy pledges aimed at showing he has not run out of steam and entrenching his public service reforms before he leaves office.

"This is my last election," he said. "At the election following there will be a different leader. What this manifesto shows is that when this party is under new leadership, it will continue to be the modern, progressive, New Labour party of the past 10 years that the British people can support with confidence."

Expressing his hope that his policies would outlive him, Mr Blair said: "The stability of that New Labour message is there, in my view now, for the forseeable future. It's there and shared by absolutely everybody on this platform."

Although a handover of power is now inevitable, Mr Blair insisted he would serve a "full term" if he wins on 5 May. Promising a "radical acceleration" of his reforms, he highlighted plans for a greater role for the private sector in health and education. John Reid, the Health Secretary, said that, in theory, there was no upper limit to the proportion of NHS operations carried out by the private sector, but suggested that a rise from the current 7 per cent to 15 per cent was realistic.

The manifesto was seen as a compromise between Blairites and allies of Gordon Brown, Mr Blair's most likely successor. "People are working out whether it is a Blairite manifesto with Brownite language or a Brownite manifesto with Blairite language," said one Labour insider.

Mr Blair said: "There is a big vision behind today's manifesto. It is that everyone, not just a few, should get the chance to succeed and make the most of the talent they have. It is to build ... a genuine opportunity society where what matters is hard work, playing by the rules, not class or privilege."

On Iraq, the manifesto said: "Many people disagreed with the action we took in Iraq. We respect and understand their views. But we should all now unite to support the fledgling democracy in Iraq."

An ICM poll in today's Guardian suggests that Mr Howard's immigration strategy is persuading more Labour supporters to return to the party than recruiting new Tory voters. Labour is on 39 per cent, six points ahead of the Tories (33 per cent) with the Liberal Democrats on 21 per cent.