Tax rises are set to follow next week’s tax cuts, ministers admitted yesterday as Gordon Brown raised the spectre of deflation in Britain for the first time.

David Cameron predicted a tax-raising “bombshell” after Lord Mandelson, the Business Secretary, spoke of the need for “structural adjustments later on” and Mr Brown himself accepted that the Pre-Budget Report (PBR) stimulus would be “temporary”.

Their remarks reflected the strong Treasury view that next week’s tax cut and spending package from the Chancellor, Alistair Darling, must be accompanied by evidence that he intends to get soaring borrowing back on course over the medium term. That should mean tax rises, spending cuts or both.

As the Prime Minister, reporting back to MPs from the Washington summit, predicted that governments across the world would soon be cutting taxes or raising spending, Mr Cameron told him to come clean and admit that his higher borrowing meant “higher taxes tomorrow”.

The Conservative leader said that Mr Brown was planning a “borrowing bombshell, which will soon become a tax bombshell”. Tax cuts should be for life, not just for Christmas, he added.

But the Prime Minister accused the Tories of failing to understand that, while the problem in recent years had been inflation, next year the problem was “deflation and the problem of inflation close to zero”. Deflation means a period of consistently falling prices that can stall economic activity and eventually lead to depression.

Yesterday’s clash came after Citigroup, the world’s biggest bank, said that it would be cutting 52,000 jobs worldwide, with an unspecified number to go from its London offices and other businesses in Britain.

After a meeting with José Manuel Barroso, the EU President, Mr Brown said that Britain, like many other European countries, was ready to make its contribution “for a temporary and affordable fiscal stimulus”.

He was clearly trying to reassure the markets that the PBR will contain proposals to get the economy back on course after the recession. He added that the need for a fiscal stimulus — “within a medium-term framework of fiscal sustainability” — was accepted across the world.

Employing an alternative euphemism, Lord Mandelson spoke of the need for a “medium-term adjustment” some years ahead. “I’ve already said that, if you take action now to expand borrowing, you know you’ll have to make structural adjustments later on. But that is later on, when we’re through this recession as we will get through,” he told the BBC.

Mr Cameron will deliver a speech on the economy today as he tries to pre-empt the impact of next week’s tax measures, which are aimed mainly at those on low incomes.

Mr Brown told MPs that most economic forecasts had assumed the absence of co-ordinated fiscal action but the downturn could be shorter and less severe if Britain and other countries took action. He pointed to the acceptance by Barack Obama, the President-elect, that a stimulus package in the United States was both necessary and urgent.

Mr Brown again paved the way for imminent tax cuts when he promised “real help for families and businesses”. It made sense for the Government to support interest-rate cuts with fiscal action, he added.

Later, when asked why the Prime Minister was now cautioning about deflation, his spokesman said: “This is obviously a risk.

“Clearly the Governor of the Bank of England was also talking about the risk last week, though both the Government and the Bank of England are making clear that is not our central forecast expectation.

“We have seen sharp falls in commodity prices and food prices in recent times, which is obviously of benefit to families, but if demand in the economy is too low, that carries significant risks as well.”

Alan Duncan, the Shadow Business Secretary, said that Lord Mandelson had admitted the truth — that taxes would rise after the election: “He has fessed up to what Gordon Brown is not prepared to admit, that unfunded tax cons now will leave taxpayers with a cripplingly expensive bill later.”

Nick Clegg, the Liberal Democrat leader, said it was right to give money back to people but, instead of borrowing for a one-off tax cut, he could get a permanent reduction for many by restructuring the system and ending loopholes for the wealthy. “The right thing to borrow for is not short-term cash bribes but long-term capital investment in infrastructure the country needs anyway,” Mr Clegg added.

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