The chancellor has been warned that the economic outlook has taken a turn for the worse over recent months.

The British Chambers of Commerce has downgraded its 2005 and 2006 growth forecast.

The BCC said that a slowdown "is highly likely" over the next 24 months - with the economy growing by just 2.4 per cent next year.

And the business organisation also warns that tax rises totalling up to £10 billion may be needed to prevent Gordon Brown breaching his own "golden rule" on borrowing over the economic cycle.

The BCC says increases on this scale would be "damaging for the economy" and could jeopardise a recovery.

Business climate

Noting that "the business climate is becoming more difficult", the BCC also warns that the recovery in manufacturing is facing an uphill struggle.

"UK manufacturing output is forecast to stage a dismal recovery," says the report. "The UK fiscal position is stretched, and there are risks of tax increases in the next two to three years.

"Excessive regulations and higher taxes are growing threats for UK businesses. Pressures for greater labour market regulation must be forcefully resisted."

Interest rates

The forecast also predicts that interest rates, currently at 4.75 per cent, may have reached their peak.

"In view of the slowdown in UK growth, further interest rises may not be needed," says the BCC.

"The UK futures interest rates market no longer signals additional repo rate increases."

"We should not rule out the possibility that 4.75 per cent will be the peak of the present interest rates cycle."