Policymakers urge Rachel Reeves to tax wealthy pensioners to stabilize public finances
Rachel Reeves is under enormous pressure from senior policy makers and economists to target wealthy pensioners and homeowners with new taxes as she tries to stabilize public finances before her November budget.
In a letter to the Prime Minister, signatories including former Cabinet Secretary Gus O’Donnell and former Finance Minister Jim O’Neill argued that the government should reform property and wealth taxes to ensure that “improve the elderly” fund funds and make greater contributions to health, social care and pensions.
The letter was also signed by high-profile economists Mariana Mazzucato, Mohamed El-Erian, Sir Anton Muscatelli, Simon Wren-Lewis and Jonathan Portes, warning that the UK’s fiscal situation would be “unsustainable” without structural changes.
The Prime Minister faces a deficit of £20 billion to £30 billion, violating its main fiscal rules, which requires daily expenses from tax revenue rather than borrowing. Some estimates suggest that the shortage could reach £40 billion once the budget responsibility office is evicted.
Reeves has ruled out raising VAT, National Insurance or Income Tax, but the letter warns that “gradual, nurturing options” still exist, especially around wealth, property and pensions. Finance officials have built the reforms into stamp duty and council tax as part of their preparation.
Economists believe that the only way to fiscal sustainability is to promote long-term growth and call on Reeves to significantly increase public investment rather than keeping it flat, as the parliament accounts for the share of GDP in that parliament. They also provide reforms to the fiscal framework, including recommendations for annual moves to individual offices to make budget responsibility forecasts to avoid policy fluctuations.
“The fiscal restrictions on the face of the UK are real, but they are inevitable,” the letter said. “If the government is ready to take action, it can increase economic growth and prosperity, enhance fiscal sustainability, and enhance confidence in business and investors.”
This letter
Dear Prime Minister,
Since taking office last year, the government has taken many gratifying steps to address long-term investments in the UK economy over the medium and long periods.
In the comprehensive expenditure review, the government made changes to the fiscal framework that allowed the £13 billion additional capital investment in the current parliament to eliminate the cuts of previous plans. This provides important enhanced infrastructure for basic infrastructure from R&D to schools and hospitals.
While this represents a useful first step to addressing the investment gap that has blocked growth and prosperity for more than a decade, tackling the economic, environmental and geopolitical challenges we as a country require a bolder approach.
As highlighted by the recent Budget Responsibility Office report on Long-term Risk, the UK’s financial situation is not sustainable. However, the fiscal policy debate is not addressing the fundamental challenges posed by issues such as climate change or our aging, but rather focusing on whether governments can encounter any short-term goals determined by highly volatile forecasts.
The only way to fiscal sustainability is to find a more sustainable growth model for the economy as a whole. This would not be possible without a significant further increase in public investment. On the current trajectory, public investment will remain flat during the course of this parliament, which is part of GDP, much below the OECD and the UK’s own post-war average.
After clear priorities were put forward throughout the mission, industrial strategies and the 10-year infrastructure plan, governments must now invest in these plans at the higher levels needed to provide these foundations to develop reliable, serious growth plans.
To achieve the stability you correctly emphasize, you must find additional tax revenue in your upcoming budget. If the government is willing to reform the tax system more fundamentally, it can provide progressive, growth-enhancing options. Most importantly, the tax and pension system needs to be rebalanced so that older people, especially those with rich property and pension wealth, contribute more to addressing the financial pressures brought about by increased spending on NHS, social care and pensions. These pressures on public spending must also be managed in a more sustainable way.
To minimize volatility, the government should also use the IMF recommendations to change the UK fiscal framework, including an annual assessment of fiscal rules. Pro-investment reforms to the fiscal framework can also improve fiscal credibility, for example, requiring governments to address long-term risks such as climate change in fiscal events. Furthermore, if appropriate safeguards are available, the government can make more use of the opportunities created by the debt rules based on net financial liabilities in the public sector.
Financial restrictions on the face of the UK are real, but inevitable. We have developed elements of a reliable strategy to boost economic growth and prosperity, enhance fiscal sustainability, and enhance business and investor confidence.
Lord Gus O’Donnell
Former cabinet secretary
Lord Jim O’Neill
Former Treasury Business Secretary
Professor Mariana Mazzucato
Founding Director of the Institute for Innovation and Public Us
Mohamed El-Erian
President of Queen’s College, Cambridge
Professor Anton Muscatelli
Adam Smith School of Business, University of Glasgow
Professor Simon Wren-Lewis
Honorary Professor of Economics, Oxford University
Professor Jonathan Port
Professor of Economics and Public Policy, King’s College London
