Think Tank: UK Income Tax Must Rise By 7%

by Robert Lee, Tax-News.com, London

23 October 2009

The National Institute of Economic and Social Research (NIESR) in the UK has suggested that there should be a 7% rise in the rate of personal income tax in order for the country's debt burden to be brought to more acceptable levels over the medium term.

While the NIESR predicts that moderate growth will return to the UK economy next year and in 2011, the rebound will be driven by higher exports rather than domestic demand and therefore unlikely to raise much in tax revenues for the government as it seeks to repair the public finances.

"This rebalancing is one reason why sorting out the public finances will be particularly painful since exports, unlike consumption, are tax-poor," the NIESR states in its latest forecast for the UK economy.

Compounding this, the report predicts that the government's borrowing requirement will fall slower than the Treasury's current forecasts.

"Whereas the Treasury is forecasting a fall in public sector net borrowing to 5.5% of GDP in 2013–14, our forecast shows borrowing at 7.7% in that year," the NIESR says. "The UK faces a structural budget deficit of 6% of GDP, and the build-up of government debt, which may reach 93% of GDP by 2015, will leave a burden for our descendants."

"Fiscal consolidation will be expensive, but the faster it happens the lower the rise in debt," the report adds.

Raising the standard rate of income tax, currently 20%, by 7%, or widening the value-added tax base by 10% of spending, would both raise 2% of gross domestic product in revenue, the report concludes.

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