The UN’s global financial fund has called on Chancellor Rachel Reeves to drop the triple lock pension and draw up ‘contingency’ tax measures to ensure that public debt is reduced as a share of GDP.
The International Monetary Fund (IMF) has said that there are ‘risks’ around spending forecasts and tax receipts, criticising the Chancellor for relying on “ambitious efficiency savings targets”. It added that the increases in receipts depend on “sizeable but uncertain yields” from HMRC administrative efforts to narrow the tax gap.
Its latest report on the state of UK public finances and the wider economy the group said: “In case the consolidation is pushed off course, contingency measures on both sides should be formulated in advance.”
It said the government should consider simplifying the tax regime by broadening the VAT base and reforming property taxes, echoing similar demands from OECD. The fund’s economists also said the welfare bill should have better controls in order to keep planned deficit reductions in place.
One key reform recommended over the longer term would be to replace the triple lock pension “with a policy of indexing the state pension to the cost of living”.
The triple lock means the state pension rises by whichever is higher out of wage growth, inflation or 2.5 per cent. Several leading economists including Office for Budget Responsibility chiefs, have labelled the mechanism “unsustainable” for public finances as it has cost three times as much as originally predicted.
Pressures for higher defence spending, supporting an ageing population and net zero expenditure could add to constraints on public finances over the coming years. IMF analysis suggested these factors could raise public spending by about six per cent of GDP by 2050.
Further increases in taxes to support spending increases could be problematic given the tax burden was rising to a post-World War 2 high, making sweeping tax reforms and introducing further spending efficiencies “fundamental” for reducing the deficit.
The government spent around £110 billion on servicing debt, with ongoing Labour leadership speculation fuelling concerns that the cost interest payments to lenders could spike further and add constraints on public finances.
The IMF slightly revised up its growth forecast for the year to one per cent while suggesting that inflation would peak at “just below four per cent later this year” before easing in mid-2027. The last IMF report said growth this year would be 0.8 per cent as the UK suffered a bigger downgrade than any G7 nation.
Chancellor Reeves said: “The IMF upgrading its growth forecasts and backing our fiscal strategy is yet more proof that this government has the right economic plan.”
On a separate issue – the introduction of a Wealth Tax is heavily debated but there is no decision yet. A new Institute for Fiscal Studies report has said annual wealth tax would create “complexity, distortions and unfairness” as policymakers have been advised to consider the trade-offs involved in addressing inequality.
The IFS’ Denton Review which involved research conducted over six years found that an annual levy on wealth would have “serious drawbacks” and lead to problems across policymaking.
Researchers at the non-partisan think tank warned that politicians would need to better define inequalities they seek to tackle before introducing radical policies. The new report will serve as a fresh warning for thinkers across the soft-left flank of British politics. Last year’s Budget was mired by wealth tax speculation amid widespread calls from Green Party campaigners and Labour MPs for a new levy to be introduced.
Green Party leader Zack Polanski claimed before last year that a wealth tax of one per cent on assets over £10 million could raise tens of billions of pounds a year. The report said that valuing wealth would be a “huge undertaking”.
“Wherever the boundary was drawn between what did and did not constitute taxable wealth, any feasible annual wealth tax would inevitably create complexity, distortion, and unfairness around the boundary,” the report said.
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