Think Tank Proposes £6 Billion Tax Hike on Pensioners and Landlords

Labour's preferred think tank, the Resolution Foundation, has proposed a significant tax increase, estimated at £6 billion, targeting pensioners and landlords to help close a substantial gap in public finances. The report, released two weeks before the upcoming budget, also suggests measures that could affect homeowners, banks, and general wealth.

Fiscal Challenges and Proposed Solutions

The think tank's analysis indicates that Chancellor John Healey's budget headroom has diminished from £24 billion to £12 billion, citing a "perilous" economic climate. The report attributes this fiscal hole partly to the conflict in the Middle East and forecasts a need for billions in additional funds for defense spending and cost-of-living support. However, it advises that such cost-of-living assistance should be concentrated on those receiving benefits or on lower incomes, leaving middle-earners to manage on their own.

Tax Reform Proposals

A key proposal revived by the Resolution Foundation is a tax switch, increasing income tax by 2p per pound while simultaneously cutting national insurance by 2p. While this would keep income tax unchanged for employed workers, it would impact the self-employed, landlords, and pensioners, who are subject to income tax but not national insurance. The report acknowledges the controversial nature of this proposal but argues that "somebody is going to have to pay for it" if significant new expenditures are to be funded. It suggests that adopting such a measure could significantly bolster confidence in the UK's public finances.

The report also outlines other potential revenue-raising measures, including reforming capital gains tax to generate an estimated £4 billion by eliminating exemptions for asset owners upon their death or departure from the country. Reducing the value-added tax (VAT) threshold for small businesses could yield an additional £2 billion. A similar sum could be raised by applying national insurance contributions to partnership income, such as for lawyers who are partners in a firm.

Further suggestions for generating billions include increased bank taxes, a hike in dividend tax, or lowering the £2 million threshold for the proposed mansion tax, though reports indicate this latter measure may have been ruled out.

Welfare Spending and Targeted Support

The Resolution Foundation's report argues against rushed reforms to the benefits system, stating they cannot be implemented in time for the budget. The think tank asserts there is "little fat to trim" from overall welfare spending without negatively impacting living standards or risking political backlash. The report does, however, recommend a £2 billion package to assist households struggling with energy bills, specifically for those most in need, and calls for a £2.3 billion increase in housing support.

Economic Headwinds

Chancellor Healey's fiscal options are reportedly constrained by rising inflation and bond market turbulence, driven by the conflict in the Middle East, which has increased borrowing costs. This economic uncertainty is expected to reduce the buffer available to the Chancellor against his fiscal rules.

James Smith, chief economist at the Resolution Foundation, described the situation as presenting the Chancellor with a "tough first act." He added, "War in the Middle East has likely halved the level of headroom he has against his fiscal rules. And with markets closely scrutinising our fiscal position, he will need to deliver a robust Budget to show he's serious about sound public finances."