The European Commission yesterday warned Gordon Brown that his pre-election Budget could breach Europe's rules for Government borrowing laid down in the Stability and Growth pact, accusing the Treasury of over-optimistic forecasts of economic growth.
The issue is theoretical since the pact applies only to countries using the euro and has already been breached with impunity by France and Germany, the two biggest euro countries.
The pact lays down that no euro Government should borrow more than three per cent of its gross domestic product, the wealth generated by its economy in any one year.
"There is a clear risk that the budgetary outcome could be worse than projected in the programme in the short term, the commission observed in a recommendation for the tax and spending programmes of six European Union states.
"In both the short and medium terms, risks are present due to the relatively optimistic forecast for GDP growth in 2005 and the potential for a weakerthanexpected recovery in receipts, particularly of corporation tax."
The Treasury retorted that its forecast for 2005 is based on "cautious audited assumptions".
" The UK", a Treasury spokesman added, " has entered the year on course to continue its record period of growth with historically low inflation and interest rates.
"The most recent public finance data show tax receipts growing and spending moderating as we continue to meet our fiscal rules."
On longer term prospects the Brussels Commission was more reassuring. Britain's public finances appeared sustainable, it said, with a national debt of 39.5 per cent of GDP, well within the EU's 60 per cent ceiling.
Separately, Christian Noyer, governor of the Bank of France and a member of the European Central Bank's governing council, signalled that a combination of reviving economic growth and high oil prices could eventually lead to rising European interest rates.
In an interview with the International Herald Tribune, Mr Noyer said: " Accommodative monetary policies around the world will have to be adjusted, even if it is at a moderate pace, in order to avoid the risk of inflationary pressures building up."
But he added that with inflation expected to be below the ECB's two per cent limit in the coming months, there was no evidence of imminent price pressures in the eurozone that could call for higher interest rates.
Mr Noyer described the present two per cent as " accommodative", at a level that stimulates growth.
But he also said the European economy is now expanding at a rate close to the two to 2.5 per cent that is considered its full potential. This could eventually require "a more neutral stance."
Consumer price inflation, the ECB's target indicator, slowed to 2.1 per cent in January and is expected to fall further this year, possibly slipping just below the two per cent the ECB considers dangerous for price stability.