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UK institute sees E38bn tax rises for ageing

UK – Taxes in the UK may have to rise by around £27bn (E38bn) a year to deal with the costs associated with demographic ageing, the head of the National Institute of Economic and Social Research has said.

The report was seen as adding weight to the government’s Pension Commission’s arguments about raising the retirement age.

“It’s £27bn per year,” said NIESR director Martin Weale. “That’s the likely increase.” He was discussing his new paper on the tax implications of demographic uncertainty for the UK.

Asked if such a figure would be politically acceptable, Weale said: “I think the answer is probably yes.” He said other countries managed well with higher tax burdens. The tax rise would help pay for higher pension and healthcare costs, he added.

Taxation is coming to the fore in the run-up to a general election that is expected this year.

The paper, which Weale co-authored with James Sefton, sought to assess the “degree of uncertainty if fiscal projections as a consequence of demographic uncertainty”.

They applied simulations to a model of population change and came up with a range of figures for possible tax rises. They found that there was even a chance that no tax rises would be needed at all. “These things are very uncertain,” Weale stated.

Weale’s findings are based on the assumption that the retirement age and tax take remain unchanged.

Averaging out the various scenarios simulation leads to the conclusion that the UK needs to raise taxes by 2.7% of gross domestic product a year. Weale said it was his “best estimate of the average”.

“A failure to increase taxes promptly to cover the future effects of demographic change means that any future increases will have to be large,” the NIESR said.

“Because of the degree of uncertainty surrounding the projection a sensible policy would be to err on the side of caution and to increase taxes by more than the average change needed.”

“It’s the first such projection I’ve ever seen,” said Watson Wyatt partner Stephen Yeo. “It does show how uncertain this business is.”

He compared it to projections in the pre-budget report which did not show a similar uncertainty.

Yeo saw the report adding “more force” to the arguments about raising the retirement age put forward by the Pension Commission under Adair Turner.

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