Brown may increase war fund to £6bn

Gordon Brown could be forced to ask Parliament for extra money to fund Britain's continuing presence in Iraq early next year, as new estimates suggest the cost of military action is running at about £4m a day.

Vince Cable, the Liberal Democrat Treasury spokes-man, warned that the Chancellor's £3.8bn fund to pay for operations in Iraq could be exhausted by January or February, if the scale of British involvement is maintained.

He said the overall cost of the British operation could approach £6bn if troops remained in Iraq through 2006, and added that there was the danger of widespread economic damage caused by the huge costs of the American-led operation.

Ministers are still debating whether to send up to 3,000 extra troops to Iraq to help quell continuing unrest amid warnings that Labour voters will use the local and European elections on 10 June to protest against the war.

Last week Geoff Hoon, the Secretary of State for Defence, confirmed that Liberal Democrat estimates that the war was costing £125m a month were "roughly consistent" with the confirmed costs since the invasion last year. Mr Cable said the long-term effect of the war could be damaging to the global economy, with instability in the Gulf contributing to increasing oil prices, and American borrowing to fund military action threatening to increase long-term interest rates.

He said: "The first Gulf war cost £2.5bn but Britain got 80 per cent of that back because it was backed by the United Nations. This war will cost Britain many times that because it has been done unilaterally.

"All this spending has an opportunity cost. It could have been spent on something else. Compared with the size of the national economy it is not all that significant, but as we enter the public-spending round there are commitments which we will not be able to make."

He warned that the huge US military spending in Iraq was helping to fuel the American budget deficit. "When you stack all of this spending up in the context of the widening fiscal deficit, there are wide implications for the rest of the world, building up long-term interest rates which everybody ultimately has to pay."

He also warned that oil dealers were paying a $10-a-barrel risk premium because of the increasing attacks by Iraqi insurgents on many of the country's oil installations.