Tax hikes will be needed to sustain the expected levels of future pension payments and benefits, a leading think-tank has said.
According to a report from the National Institute of Economic and Social Research (NIESR), people aged over 65 will get £220,000 more from the state than they would have contributed over the course of their lives. However, a new born child now will probably pay a net £159,000 more in taxes and contributions than they will receive in return from the state in benefits and services. The effect will be to create a multi-trillion pound commitment that must be met by future generations. But closing that tax and pensions gap could cost as much as between £80 billion and £90 billion a year in additional taxes, the NIESR warned. The estimated shortfall in public funds is primarily driven by pressures on health and pension spending, the NIESR said, rather than by rises in government debt. So tax increases amounting to 6 per cent GDP may be needed in the future if the country is to avoid a serious diminution in services. That is the equivalent of 16 per cent of total current tax receipts. The report said: "There is a past history of pay-as-you-go benefits which has allowed earlier generations to receive more from the state than they have contributed over their lifetimes, and it is inevitable that there is now a net contribution which has to be paid.
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The Budget must contain the promise of tax cuts if the UK is to escape the perception that it is a high tax economy.
That was the eve-of-Budget message from the Institute of Directors (IoD). The business organisation argued that the Budget must set out four fundamental changes to the tax system. It claimed that the proposals involve either little or no cost over the course of the current spending review or more significant cost beyond 2014-15. The IoD is pushing for an abolition of the top 50 per cent income tax rate, which covers earnings over £150,000 a year, by 2015. While the current economic situation means that dropping the rate immediately would be difficult, signaling its eventual demise would raise business confidence, the IoD said. Also on the personal tax front, the IoD called for an end to the withdrawal of the personal tax allowance on earnings above £100,000. To encourage business, the Chancellor should commit the Government to reducing corporation tax to 15 per cent by 2020. This would give the UK the lowest corporate tax rate in the world. Cutting the corporation tax rate from 24 per cent (to which it is due to fall) to 15 per cent would cost around £9 billion per annum. However, the IoD said, this would be funded by continued restraint in public spending growth and the simplification of certain allowances, together with the impact on GDP growth from greater business investment in the UK. The fourth area identified by the IoD is an exemption from future capital gains tax for entrepreneurial investments. Under the IoD proposals, anyone subscribing for shares in a new company starting between now and 5 April 2012 would be exempt from capital gains tax when they sell those shares. This, the IoD added, would encourage the injection of fresh equity capital into businesses. Miles Templeman, the IoD' s director-general, commented: "Since there is little money in the Treasury's coffers many people are assuming that there's not much George Osborne can do to kick-start economic activity and strengthen the recovery in the Budget. They couldn't be more wrong. Now is the time for the Government to signal in the strongest possible terms its determination to make the UK one of the most tax competitive countries in the world. "The Chancellor can send this signal by announcing in the Budget that the 50 per cent income tax rate will be abolished by 2014-15, and corporation tax will be reduced to 15 per cent by 2020. This is one of the most dynamic areas of the tax system where deep cuts in rates could transform business behaviour and raise more revenue in the long term. "This has the potential to boost business confidence and increase inward investment into the UK. We can't afford to make all these tax changes today, but signalling tax cuts for tomorrow could still boost business confidence." |