Warnings by the IMF that the economy will be damaged by any more tax rises and that curbs on spending are essential to deliver government budget plans yesterday underlined the lack of financial room for manoeuvre facing Gordon Brown as he prepares for a likely move to No 10.

The International Monetary Fund’s annual healthcheck on the economy gave broad support to the Chancellor’s belief that tax revenues should rise by enough to cut high levels of public borrowing in the coming years without further increases in tax rates.

But the IMF’s analysis also emphasised the financial straitjacket facing Mr Brown in what are expected to be his final months as Chancellor early next year, and as the likely Prime Minister in the run-up to the next election.

The Fund’s report welcomed Mr Brown’s plans to rein-in growth in public spending and cut it as a proportion of national income in coming years.

However, it said that to achieve this, “tough choices” would be needed in next year’s Comprehensive Spending Review of budget plans for all Whitehall departments, in which spending is presently slated to grow by just 1.9 per cent a year after inflation. Existing high levels of government borrowing, at close to 3 per cent of GDP, meant that “continued fiscal restraint is essential”, the IMF warned Mr Brown.

Even in the present financial year, government spending was overshooting the Treasury planned levels, the IMF noted. This meant that “tough discipline through the remainder of the year is needed”.

The Fund suggested that if British or global economic conditions were to worsen sharply, or the Treasury failed to curb spending as it intends, the Chancellor is at risk of being boxed in, with attempts to raise more taxes to keep the public finances in order liable to backfire. “Further tax increases would risk adversely affecting incentives to work and invest,” the IMF said.

It added that with total government debt now set to rise to 39 per cent, just below the Chancellor’s 40 per cent ceiling under his self-imposed rules, Britain’s ability to cope with the repercussions of any economic downturn could be hampered. High borrowing and debt would make it hard to allow a so-called “automatic stabiliser”, through higher benefit payouts, to work fully without breaking the fiscal rules.