Chancellor Rachel Reeves should target wealthy pensioners to ease pressures on the public purse and allow infrastructure investment pledges to be protected, top economists and former ministers have said.
Former Cabinet secretary Gus O’Donnell, ex Tory minister and Goldman Sachs executive Jim O’Neill, and top economists including Mariana Mazzucato have urged the government to “rebalance” the tax system to fund spending pledges.
It is widely expected that Reeves will have to raise at least £25bn – and potentially up to £50bn – in order to rebuild her small fiscal headroom left at this year’s Spring Statement.
The OBR has reportedly warned Reeves that it is likely to lower productivity forecasts ahead of the Budget, which would create a shortfall worth dozens of billions of pounds depending on the extent of its downgrade.
The letter, published in The Times, said that Reeves needed to “provide the foundations” for growth by reforming the wider tax system.
“Above all, the tax and pension system needs to be rebalanced so that better-off older people, especially those with substantial property and pension wealth, make a much larger contribution to addressing the fiscal pressures that result from increasing spend on the NHS, social care and pensions,” signatories including former Cabinet Office economists Jonthan Portes and Allianz adviser Mohamed El-Erian said.
“These and other pressures on public spending must also be managed in a more sustainable way.”
Rachel Reeves told to adjust fiscal rules
Economists also recommend an adjustment to her fiscal rules which would lead to the OBR making just one fiscal forecast a year, a move that has already been endorsed by the International Monetary Fund (IMF) and some economists.
They also claim Rachel Reeves could make “more use of the opportunities” provided by her rules’ focus on using public sector net financial liabilities (PSNFL) as a measure of government debt rather than total debt as a share of GDP.
The Chancellor’s “investment rule”, which ensures PSNFL falls as a share of GDP over a three-year rolling forecast period, allows the government to be more flexible with borrowing given financial assets in loans and pension liabilities are included in calculations for debt.
“Pro-investment reforms to the fiscal framework could also boost fiscal credibility, for example by requiring governments to address long-term risks, like climate change, at fiscal events,” economists added.
It has been widely suggested that Rachel Reeves will make sweeping changes to how pension pots are taxed while gambling levies could be raised to rebuild her headroom.
Changes to the property tax system are also on the table, with City AM this week revealing discussions had taken place to make the stamp duty a staggered payment as part of reforms to boost the housing market.
Economists at JP Morgan believe Rachel Reeves may build a smaller headroom than £9.9bn, which is already the third smallest fiscal buffer of the last 15 years, while Goldman Sachs analysts have suggested that the Chancellor may fail to ease pressures on public finances by raising taxes further.
