State pension set to pile pain on next generation of taxpayers, Healey warned
The state pension is set to be the main driver of tax for the next generation of taxpayers, a Labour-linked think tank has warned in a paper that urged Chancellor John Healey to levy higher charges on wealth rather than income.
New research from the Institute for Public Policy Research (IPPR), the former employer of Cabinet ministers and top advisers such as energy secretary Miatta Fahnbulleh and the Chancellor’s chief of staff Will Straw, has raised the alarm on the costs of an ageing population.
The paper found that demographic changes will make up two-thirds of rising fiscal pressures on the government by 2050 and four-fifths of pressures by 2075.
The analysis, based on long term projections by the Office for Budget Responsibility (OBR), suggested the proportion of people aged over 65 in 2075 could surpass a quarter of all people, compared to a current level of around 18 per cent.
Professor Ben Ansell, the Oxford University political scientist who wrote the report, warned that the cost of the state pension and higher health spending would add about 10 per cent of GDP to the fiscal burden on taxpayers in 2075. The state pension is set to make up about three percentage points of the rise, of which around half is due to the triple lock pension.
The analysis follows a raft of warnings from top economists that the triple lock pension could push benefits on old age to about £181bn by 2030 under current projections. The triple lock pension ensures that recipients see their benefits rise by whichever is highest out of inflation, wage growth or 2.5 per cent.
The OBR said earlier this year that the growing cost of paying for pensioners would help swell UK public debt to three times the size of the economy and place an “unsustainable” pressure on public finances.
“Ageing is going to become by far the biggest source of pressure on the public finances,” Ansell said.
“Yet our tax system has increasingly shifted responsibility towards younger workers while protecting many of those who have benefited most from decades of rising property and asset wealth.
“Reform is politically difficult, but avoiding it has simply given Britain an ever more complicated tax system.
“We need a new fiscal contract: one that raises the revenue the country will need, shifts more of the burden from work towards wealth and property, and is honest with the public about who pays and why.”
Reform taxes to ease state pension costs
The Oxford professor said changes to the tax system could ease fiscal pressures facing the UK economy as he warned against adding small revenue-raisers that produce “howls of displeasure from those affected”.
He urged Healey to consider a “rebalance” in the tax system that drew more cash out of wealth rather than income by “stealth”.
He suggested that council taxes and stamp duty should be replaced by a proportional property tax rate set at 0.65 per cent. He also backed plans mooted by senior Labour figures to level capital gains tax rates with income taxes.
Ansell said further changes to apply a two per cent national insurance surcharge on pensioners would help to create a “new fiscal contract” that would “rebalance the system away from younger workers and towards wealth, property and unearned gains”.
The academic also pushed Healey to consider how to tax AI if wealth becomes concentrated due to its effects on the jobs market and UK economy.
His report suggested that taxes on the use of AI, referred to as floating point or FLOP levies, could pose problems in terms of design and collection.