Tax rises of £40bn ‘needed by mid-2020s’ to cut deficit

Taxes will need to rise by £40bn per year by the mid-2020s if the government wants to keep spending constant and balance its books, a think tank warns.

The Institute for Fiscal Studies added that dismal productivity, earnings and GDP growth had become the “new normal”.

It comes after the chancellor unveiled upgraded growth and borrowing forecasts in the Spring Statement on Tuesday.

Philip Hammond said the UK economy had reached a turning point and there was “light at the end of the tunnel”.

The chancellor told MPs growth was now forecast to be 1.5% in 2018, up from 1.4% forecast by the Office for Budget Responsibility in November.

Debt is also expected to fall as a share of GDP from 2018-19, the first drop in 17 years.

However, Paul Johnson, director of the Institute for Fiscal Studies (IFS), said that “nothing much” had changed on Tuesday.

He said the good news on borrowing would “largely wash out” over the next few years, while the structural deficit in 2019-20 would be almost unchanged.

He also said the UK’s growth prospects were “among the worst in the G20”.

Wages ‘below 2008’

“The reality of the economic and fiscal challenges facing us ought to be at the very top of the news agenda, ” Mr Johnson said.

“And I mean the reality, not the spin and bluster of politicians on all sides pretending there are easy solutions.”

Mr Johnson said the UK was still suffering the hangover of the 2008 financial crisis, which had led to the worst decade of growth since “at least” World War Two.

The economy is now 14% smaller than would have been expected, based on pre-crisis trends, while median earnings remain below their 2008 level, he said.

He said the big problem facing the chancellor was how to balance growing demands for spending increases with his desire to cut the deficit by the mid 2020s.

On the one hand, he said public services such as prisons and the NHS were struggling “in a way that they were not two or three years ago”.

Tax challenge

However, this job was made tougher because the government had taken large numbers of people out of paying income tax and had failed to tackle the growing number of self-employed people who paid less tax.

“If high-paid jobs – and EU citizens, who are well represented among high earners in the UK – relocate elsewhere, the consequences for the Exchequer will be severe,” Mr Johnson said.

Given the outlook, the think tank said tax rises of £30bn would be needed each year to retain public spending and balance the budget by the middle of the next decade.

An extra £11bn would be required to cover social care, health and pension costs for the ageing population, it said.


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