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Rachel Reeves is facing increasing pressure from leading policymakers and economists to focus on affluent retirees and property owners with new taxes as she aims to stabilize public finances ahead of November’s Budget.
In a correspondence addressed to the Chancellor, endorsers including Lord Gus O’Donnell, the previous cabinet secretary, and Lord Jim O’Neill, the former Treasury minister, asserted that the government ought to overhaul property and wealth taxes to guarantee “better-off older adults” contribute more significantly to financing health, social care, and pensions.
The letter, which also included prominent economists Mariana Mazzucato, Mohamed El-Erian, Sir Anton Muscatelli, Simon Wren-Lewis, and Jonathan Portes, cautioned that the UK’s fiscal status is “not sustainable” without fundamental alterations to the tax base.
The Chancellor is contending with a deficit estimated between £20bn and £30bn against her main fiscal regulation, which mandates that daily expenditures be financed through tax revenues rather than borrowing. Some projections indicate the gap could soar to £40bn once reduced growth and productivity predictions from the Office for Budget Responsibility are taken into account.
Reeves has already dismissed raising VAT, national insurance, or income tax; however, the letter cautioned that “progressive, growth-oriented options” remain, particularly regarding wealth, property, and pensions. Treasury officials are already contemplating reforms to stamp duty and council tax as part of their preparations.
The economists contended that the sole pathway to fiscal sustainability lies in enhancing long-term growth and urged Reeves to significantly raise public investment instead of allowing it to stagnate as a proportion of GDP throughout this parliament. They also supported revisions to the fiscal framework, including the International Monetary Fund’s suggestion to adopt a single Office for Budget Responsibility forecast annually, to prevent policy instability.
“The fiscal limitations that the UK encounters are genuine, but they are not unavoidable,” the letter stated. “An actionable plan to stimulate economic growth and prosperity, fortify fiscal sustainability, and boost business and investor confidence is within reach if the government is willing to take action.”
The Letter
Dear Chancellor,
Since assuming office last year, this government has initiated a series of positive measures to tackle the considerable, enduring under-investment in the UK economy.
During the Comprehensive Spending Review, the government expedited modifications to the fiscal framework allowing for £113 billion of supplementary capital investment in the current Parliament, offsetting the previously outlined cuts. This provided an essential uplift across the vital infrastructure that underpins our economy, from research and development to educational institutions and hospitals.
While this signifies a constructive initial step in addressing the investment shortfall that has hindered growth and prosperity for over a decade, a far more ambitious strategy is necessary to tackle the economic, environmental, and geopolitical challenges we face as a nation.
As underscored by the recent Office for Budget Responsibility report on long-term threats, the UK finances are not on a viable trajectory. Yet instead of confronting the fundamental issues posed by challenges such as climate change or our aging population, the fiscal policy discourse is centered on whether the government can achieve arbitrary, short-term targets set by highly variable forecasts.
The only pathway to fiscal sustainability lies in discovering a more sustainable growth model for the overall economy. This will not come to fruition without a substantial further increase in public investment. On the existing path, public investment is projected to remain stagnant as a share of GDP throughout this Parliament, significantly lower than both the OECD and the UK’s own post-war averages.
Having established clear priorities across the missions, the Industrial Strategy, and the Ten-Year Infrastructure Plan, the government must now elevate its investments to the necessary level to lay the groundwork for a credible, serious growth plan.
To deliver the stability you have appropriately underscored, you must identify additional tax revenue in the forthcoming Budget. Progressive, growth-oriented options are available if the government is willing to undertake more fundamental reforms to the taxation system. Above all, the tax and pension frameworks need to be rebalanced so that wealthier older adults, especially those possessing significant property and pension wealth, contribute far more to managing the fiscal pressures stemming from increased expenditures on the NHS, social care, and pensions. These and other public spending pressures must also be handled in a more sustainable manner.
To mitigate volatility, the government should also adopt the IMF’s suggested revisions to the UK fiscal framework, including transitioning to one assessment against the fiscal rules per year. Pro-investment reforms to the fiscal structure could also enhance fiscal credibility, such as requiring governments to address long-term risks, like climate change, during fiscal events. Moreover, with proper safeguards, the government could capitalize on the opportunities arising from last year’s shift to a debt rule based on public sector net financial liabilities.
The fiscal limitations that the UK faces are authentic, yet they are not insurmountable. We have outlined the components of a credible strategy to invigorate economic growth and prosperity, bolster fiscal sustainability, and enhance business and investor confidence.
Lord Gus O’Donnell
Former cabinet secretary
Lord Jim O’Neill
Former commercial secretary to the Treasury
Professor Mariana Mazzucato
Founding director of the Institute for Innovation and Public Purpose, University College London
Mohamed El-Erian
President of Queens’ College, Cambridge
Professor Sir Anton Muscatelli
Adam Smith Business School, University of Glasgow
Professor Simon Wren-Lewis
Emeritus professor of economics, University of Oxford
Professor Jonathan Portes
Professor of economics and public policy, King’s College London
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