Reviewing Rishi Sunak’s first Budget, IFS director Paul Johnson (pictured) suggested stamp duty and council tax were the key measures which needed an overhaul but also noted that capital gains tax could be another area ripe for reform.
He also warned that the housing market was returning to Victorian times as young people were increasingly reliant on family and inherited wealth to buy a property.
Away from the housing sector, Johnson highlighted that taxes would need to rise to cover the increased borrowing to fund the spending plans Sunak announced.
But he feared that, contrary to Sunak’s protestations, the economy was not in a strong place with average growth of around just 1.5 per cent predicted over the next three years.
Reduce stamp duty
Speaking at the Equity Release Summit, Johnson said: “There’s a case for significantly overhauling the taxation of housing.
“Reducing stamp duty but increasing council tax would make things more equitable – you can tell I’m not getting elected here – and in the long run we probably should be putting VAT on household fuel and electricity.”
Johnson added that there are a “series of things you can do towards taxing capital gains” and it remained the case “that investment income is very lightly taxed relative to earned income in many circumstances”.
Inheritance reliance sign of Victorian times
Regarding the wider house purchase market Johnson continued: “It looks like inheritance is becoming more important, it’s increasingly difficult for young people to be able to buy their own houses off the back of what they can save.
“Partly because earnings have been poor, returns on savings have been low, and house prices have been maintained by monetary policy.
“That doesn’t seem to me to be a great public policy outcome that if you’re lucky enough to have chosen the right parents you’re alright, if not then you’re not. That does feel like a return to Victorian times for me.”
He noted equity release would allow inheritance earlier, with people living longer and therefore was an opportunity to move wealth down the generations.
But added: “I think it is a shame if we come to rely on that for a part of the younger generation [to buy a home] and the other part suffers by comparison.
“That may be unavoidable, but I would hope government policy would move in the direction of allowing more people to have the money that they need, rather than just a minority.”
He also highlighted the government did not appear to be living up to its climate change claims by failing to increase petrol duty as the cost of oil has slumped.
‘Very weak’ economic outlook
And there were further significant concerns about the overall health of the economy with the Office for Budget Responsibility’s forecasts remaining “very weak” even before considering the impacts of coronavirus.
“Projected growth rates averaging barely over one and a half per cent a year for the next five years are feeble and indicative of an economy that is not in a robust position for coping with shocks like the coronavirus,” he said.
“The OBR continues to assume an orderly move to a free trade agreement with the EU. Anything less orderly, or a failure to achieve such an agreement, would weaken an already weak economy even further.”
A key plank of Sunak’s plans was a significant raise in investment spending, but Johnson argued that the big challenge will be to ensure this money is well spent.
And he added current spending per person for most public services will remain well below 2010-11 levels in 2024-25.
“Importantly, while austerity is clearly at an end in the sense that spending is rising, spending levels in many areas are set to remain well below 2010 levels for a long time to come. Expectations may be disappointed.”
Johnson concluded that there were “plenty of risks and omissions lurking” in the Budget with the bigger risks in the short term around spending the cash set aside for investment projects effectively, and in disappointing expectations on current spending.
“In the longer-term, higher borrowing and debt carry their own risks,” and he added that the lack of any coherent strategy on tax was a long-standing gripe.