Think-tank urges 7p income tax hike

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Economic think-tank the National Institute for Economic and Social Research (NIESR) warned that debt could reach 93% of UK national income by 2015, leaving "a burden for our descendants" if it is not reduced.

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

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, said the report.

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

"Raising the standard rate of income tax by 7p or widening the VAT base by 10% of spending would both raise 2% of GDP revenue, as would a five-year public sector pay freeze, or a 10% cut in services.

"All are costly and consumption would be higher and debts lower if the retirement age is increased more rapidly than planned. There is a case for extending working lives by three years in order to reduce the structural deficit by 3% of GDP."

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.