Pensioners risk paying for Labour tax cuts, says IFS
Pensioners may face financial challenges as a result of Labour’s plans to cut taxes for working people, according to the Institute for Fiscal Studies (IFS). The director of the IFS, Paul Johnson, warned that if Labour wants to implement tax cuts on income tax or national insurance, they will have to compensate by raising taxes elsewhere. This could include reducing tax relief on pension contributions, resulting in individuals being able to save less tax-free for retirement.
The IFS research indicates that homeowners with more valuable properties might also be subjected to higher council tax bills under these proposed policies. As a result, many current pensioners who tend to live in larger and more valuable homes could be disproportionately affected. The IFS also suggests that inheritance tax rules could be tightened, making it more difficult for the elderly to pass on their wealth to their families without incurring additional levies.
Mr. Johnson emphasized that Labour has various options to consider in order to fund their tax cuts. These options range from increasing council tax for expensive properties, reforming capital gains tax, closing inheritance tax loopholes, to decreasing tax relief on pensions. However, he cautioned that implementing the proposed tax cuts without raising other taxes would not allow Labour to balance the national budget. The party would need to turn to tax increases since there is little room for fiscal maneuvering, given the strained state of public services and the minimal scope for spending cuts.
The Shadow Chancellor, Rachel Reeves, is reportedly contemplating including a promise to cut income tax or national insurance in Labour’s election manifesto. However, according to Mr. Johnson, these tax cuts would likely be offset by larger tax increases, and he expressed skepticism that any proposed tax cuts would result in a net reduction in taxes for individuals.
Previous discussions within Labour have focused on increasing taxes for private schools and non-doms, but these measures alone would not generate sufficient revenue to support income tax or national insurance cuts. For example, reducing the basic rate of income tax by 2p would cost the Treasury nearly £14bn in 2025-26, according to HM Revenue & Customs (HMRC).
The IFS suggests that one potential source of additional revenue could come from reducing tax relief on pension contributions to match the level of basic income tax, which could potentially raise an extra £15bn for the Treasury. However, such a move could have repercussions for workers, as they would be able to save less for retirement.
Labour’s plans to cut taxes without simultaneously addressing the budget deficit could lead to a situation similar to the fallout from the Liz Truss mini-Budget in September 2022. Ms. Reeves was forced to scale back borrowing plans after unexpected inflation caused interest rate expectations to rise.
In response to the concerns raised by the IFS, Ms. Reeves highlighted Labour’s commitment to economic and fiscal responsibility, suggesting that the party would not indiscriminately increase spending. However, Mr. Johnson argued that the scope for public spending cuts is considerably smaller than in 2010 when then-Chancellor George Osborne reduced state spending to address the deficit.
The Autumn Statement delivered by Chancellor Jeremy Hunt already outlined upcoming real-terms funding cuts for public services. Given this context, the challenge for Labour lies in finding a balance between tax cuts and the need to address budgetary pressures and public service demands.
Labour has been approached for comment but had not responded at the time of writing.
