‘Significant action’ is needed to stabilise UK finances

Rachel Reeves has been warned that “significant action” is needed to stabilise the public finances in a report that calls for an overhaul of the fiscal regime, including scrapping stamp duty and reining in the pension triple lock.
The Organisation for Economic Co-operation and Development said that the government faced “mounting spending pressures” stemming from higher health, pension and climate change costs.
The body representing 38 rich economies said that these “needs come on top of the current difficult position of high debt, high interest payments and low growth, which raises borrowing cost over time”.
The OECD is the latest economics institution to warn of Britain’s unsustainable debt trajectory under the existing fiscal framework, placing pressure on the chancellor ahead of next month’s budget. Last week the Office for Budget Responsibility forecast that debt as a share of GDP would hit 270 per cent in 50 years’ time, largely because of greater healthcare and pension spending.
Reeves is expected to raise a range of taxes in her first budget as chancellor on October 30 in an effort to bear down on about £22 billion of government overspending.
The OECD’s researchers said that the “expensive” triple lock should be scaled back to increasing pension entitlements to an average of inflation and wages growth. At present, pensions rise by whatever is highest out of 2.5 per cent, inflation and pay growth. The International Monetary Fund similarly has recommended curbing the generosity of the triple lock.
“Significant action is needed to stabilise public debt over the longer term,” the OECD said, including making the tax system fairer and more efficient. It also called for greater public investment, which probably would require adjusting the fiscal rules.
“Since investment is treated in the same way as current spending, resources allocated to public investment often end up as the adjustment variable to meet fiscal rules, resulting in inefficiently low levels of productivity-enhancing public investment,” it said.
The body also said that stamp duty, a tax on property sales, should be abolished altogether as it discouraged people hoping “to move for better job prospects or to downsize during retirement, hampering the reallocation of housing in a tight market”.
Other recommendations included unfreezing fuel duty, simplifying the income tax system and curbing the amount of interest expenditure that companies can deduct from their tax bills. The government should update property values, which determine how much council tax a household pays, it said. At present bills in England are based on property valuations from 1991.
A series of economic shocks, including the 2008 global financial crisis, the pandemic and the energy price surge, have pushed up the UK’s debt to nearly 100 per cent, from about 35 per cent 16 years ago. While there is no specific level of debt that can trigger a government financial crisis, economists generally agree that debt can become unsustainable if interest rate payments exceed a country’s growth rate, a situation that Britain and many rich countries now find themselves in. About 9p in every £1 the government spends will go toward debt interest costs over the next five years.
During the general election campaign the IMF urged both Labour and the Conservatives not to promise voters deep tax cuts that could undermine fiscal credibility.
The Treasury said: “Following the spending audit, the chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and address the £22 billion hole the government has inherited. Decisions on how to do that will be taken at the budget.”