Britain can have lower taxes and better public services, a think tank has claimed.

The Centre for Policy Studies claimed on Monday that the government's decision to raise National Insurance contributions was damaging wealth creation.

It called for the ratio of public spending to GDP to be reduced down to 40 per cent from its forecast level for 2005 of 42 per cent.

Researchers claimed that simply by slowing the rate of government spending the cut could be achieved without cutting existing public spending.

This would allow for a £26 billion tax reduction - equivalent to £1,000 per family

"Britain has a choice - to fall back into inward looking decline, its economy and its spirit increasingly burdened by the weight of government intervention, gradually losing its independent voice in the world; or to liberate its talent and enterprise at home," said the report.

"That entails choosing the right policies now - policies based on a belief that releasing enterprise and personal responsibility is more effective than growing state control."