The Government may have to add 7p to every £1 of basic rate income tax due as part of efforts to cut the national debt, according to a report published today.
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
