Rachel Reeves should combine “unavoidable” tax hikes in her Budget with tax reform such as merging income and national insurance levies and scrapping fuel duty relief, two top figures from the coalition government years have said.
Tory former chancellor George Osborne argued it would be “messy” to make small adjustments and it would be “easier to go for one of the big three taxes: income tax, national insurance or VAT” while overhauling the system.
He revealed that tax reform he had considered with Liberal Democrat Treasury ministers when the two parties were in a coalition was overruled by then-prime minister David Cameron in favour of smaller changes, leading to the so-called “pasty tax” in his 2012 budget he was later forced to row back due to a backbench rebellion.
Mr Osborne told the Treasury Committee on Wednesday they had agreed to introduce two additional bands of council tax for high value properties in order to cut the top rate of income tax from 50% to 40%.
“And then for perfectly good, sound political reasons, David Cameron felt the Conservatives had promised not to have a mansion tax…
“And so we settled on 45% and a series of small taxes, including taxes on hot food to pay for it.
“That is a good example of tax reform being quite hard when you’re trying to raise taxes.”
Mr Osborne argued the Chancellor should merge income tax and national insurance as “it’s sort of odd we have two taxes on income”.
Lib Dem former business secretary Sir Vince Cable said there is often a “grotesque mismatch between the economics and the politics”.
He told MPs: “We’ve cut fuel duty by 40% in the last 15 years or so for political reasons.
“It’s bad for revenue, it’s bad for the environment. And any academic economist would say we should be moving across to road users pricing, which we’re going to need anyway when we have electric vehicles. But the politics of that are just very, very difficult.”
Sir Vince said “a substantial tax is unavoidable” in Labour’s November 26 Budget.
He said: “I think it’s almost certain that the Chancellor will need to use a broad-based tax. Income tax is the obvious one.
“But I would just make the point that these things are not just easier politically to present, but better policy if it’s combined with tax reform.
“We have an extraordinarily complicated and perverse system of taxation.”
Sir Vince said moving towards integrating national insurance and income tax “would be a very positive step” and called for a “more coherent” property tax system.
The triple lock, which sees pensions rise by whichever is higher of 2%, inflation or average earnings, is “not sustainable and makes no sense in the long run”, he said.
The two former cabinet ministers appeared before the cross-party panel of MPs as part of its series looking ahead to the Budget.
Ms Reeves is widely expected to rip up Labour’s manifesto pledge not to raise certain taxes in three weeks’ time by increasing the basic rate of income tax.
