Report raises option of 7p income tax hike

Economic thinktank, the National Institute for Economic and Social Research, warns debt could reach 93% of UK national income by 2015, leaving "a burden for our descendants" if not reduced (see the Latest Tax Rates guide).

Spending cuts alone may not be enough to deal with a structural deficit running at 6% of GDP each year, it warns.

A 7p hike in the standard rate of income tax to 27% – pushing individuals' bills up by as much as £2,600 – would raise revenue equivalent to 2% of GDP, today's report says.

Similar sums could be raised by extending VAT to a wider range of goods, or by imposing a five-year public sector pay freeze, or by a 10% cut in public services.

Pushing up the retirement age to 68 for men could reduce the structural deficit by 3% of GDP by cutting the pension bill and increasing consumption.

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

NIESR forecast that Britain's economy will return to growth next year after a 4.4% fall in GDP in 2009. The thinktank predicted GDP growth of 1.3% in 2010 and 1.5% in 2011.

But it warned that consumer spending will continue to fall, though at a lower rate than the 3.3% decline seen this year, dropping by 0.7% in 2010 and 0.1% in 2011 as wary families save more of their income.

Today's report projected that savings will reach 8.2% of disposable income by 2011, compared to just 1.7% in 2008.

Its forecast that public sector net borrowing will fall to 7.7% of GDP in 2013/14 was more pessimistic than the Treasury's projection of 5.5%.

Further reading/Key Links

How much to pay? Latest Tax Rates Frequently asked tax questions: Taxing Times 6