A new report has found that the income tax rates in the UK may have to rise by a staggering 12 pence in the pound over the next few decades in order to keep Britain’s public finances at a sustainable level.
The UK’s debt is currently at more than 60 per cent of national income, compared to the 40 per cent level that is considered ‘safe’ for a solvent economy. Spending cuts in excess of the Government’s current plans and tax rises are seen as the only way to cope with the aftermath of the global financial crisis and the challenges of an aging population.
Income tax needs to rise by 12p in the pound to plug hole in finances
The report from the Office of Budget Responsibility (OBR) – an independent think tank set up by Chancellor George Osborne – has painted a nightmare picture for the UK economy.
An aging population in the UK is pushing up the costs of pension and healthcare, meaning that in fifty years time over a quarter of the UK population will be over the age of 65. The cost of pensions and healthcare will rise to £80 billion by the year 2061 meaning that unless the NHS becomes significantly more efficient, the Government will have to raise an additional £57 billion every year in taxes.
As a 1p rise in income tax raises £4.6 billion, taxes would have to rise by 12p to bring down the UK’s debt to the levels last seen before the recession.
Robert Chote, head of the OBR, said: “The Government is likely to have to tax more or spend less elsewhere to keep the public finances on a sustainable path.”
In the short term, an income tax rise of 5p is considered the minimum amount that would be necessary to get the UK economy back on an even keel. The OBR report said: ‘Under our central projections, the Government would need to implement a permanent tax increase or spending cut of 1.5 per cent of GDP (£22billion in today’s terms) in 2016/17 to get debt back to 40 per cent.’
The Daily Mail reports that ‘if ministers decide to put up taxes, this would equate to an increase of almost 5p on the basic and higher rate of income tax.’
Part of the problem over the next few decades will be caused by a reduction in some of the other tax revenues that the Government enjoys. The OBR report pointed to the declining revenues from fuel duty as cars become more fuel efficient whilst tax revenues from tobacco shrink as less and less people smoke.