Pension savings are a “juicy target” for Rachel Reeves as she attempts to balance the books with tax rises and spending cuts a leading think tank warns. There is “a good chance” that the Chancellor will be forced to increase taxes further according to Paul Johnson, Director of the Institute for Fiscal Studies (IFS). Other options for the Chancellor included a stealth rise in income tax, or raising more money through changes to council tax. But even fears that further tax hikes are coming could cause damage to the economy, he warned.
Mr Johnson said there had been speculation in the past that the Chancellor was considering taxing contributions made by people saving into a pension, which are currently tax free. He said: “One of the reasons that I worry about pension taxation is it looks like a nice juicy place to go for quite a lot of money but not necessarily always a good way of raising money.”
At the same time, the IFS said the Treasury’s figures suggested huge cuts to some public services would be needed. Because services such as the NHS are “protected”, it means the burden could fall on schools, courts and prisons. The warning came in the IFS analysis of the Chancellor’s spring statement this week, along with data from Treasury watchdog the Office for Budget Responsibility (OBR).
Mr Johnson pointed out that the Government is now set to borrow £50 billion more than it was predicting in October last year, despite Ms Reeves’s goal of getting borrowing down, And he said the watchdog has found there was only a 54% chance she would meet her targets.
He said: “There is a good chance that economic and fiscal forecasts will deteriorate seriously between now and an autumn budget, If so, she will need to come back for more,which will likely mean raising taxes even further. And that risks months of speculation over what those tax rises might be.”
Mr Johnson said the most likely option however was that Ms Reeves would extend the freeze on income tax and National Insurance, a stealth tax which effectively increases taxes on wages.
“The easiest political win would probably be to extend by another two years the freezes in Income Tax and National Insurance thresholds and allowances.”
But council tax could also rise, he said: “All sorts of reforms that need to be made to council tax that could get you some more money.”
IFS analyst Bee Boileau said the Treasury’s own figures “implied” that cuts to public services would be essential.
And Mr Johnson predicted the Chancellor’s plans “will inevitably mean cuts for some departments in the years to come.”
Watchdog the OBR has slashed UK economic growth forecasts for the year, highlighted a sharper rise in inflation and warned hat interest rates are set to stay higher for longer.
The OBR said that it expects UK gross domestic product (GDP) to rise by 1% in 2025.
Meanwhile, UK inflation is now expected to average 3.2% this year, according to the OBR. It represents a significant increase against the OBR’s previous forecast of 2.6%.
Government borrowing is expected to remain high to help balance the books over the coming years, with the OBR upgrading borrowing expectations for the rest of the forecast period.
Elsewhere, unemployment is now on track to strike 4.5%, or around 1.6 million people, this year, as the forecaster increased its previous prediction of 4.1% for 2025.
