MNI INTERVIEW: Uncertain Fiscal Boost From Taxing UK Pensions

The boost to government coffers from any reduction in tax relief on pension contributions in the upcoming UK budget would be hard to predict, and such a move would unfairly hit those with more variable incomes, Institute for Fiscal Studies economist Isaac Delestre told MNI.

With Chancellor of the Exchequer Rachel Reeves having ruled out raising VAT, National Insurance contributions or income tax, which together account for about two thirds of total tax revenue, speculation has grown that she could instead make other moves. Capping tax relief on pension contributions at 20% would raise GBP22 billion, enough to restore the GBP10 billion margin by which Reeves met one of her fiscal rules in March, according to IFS calculations. (See MNI: Keeping UK Manifesto Promises Tough, Not Impossible - IFS) 

But Delestre stressed the uncertainty of the IFS’s own projections.

"When you make really big changes to the tax system, it's just much less certain what will happen," whereas "if you make smaller, incremental changes, you can normally tell with a greater degree of confidence how people are going to respond,” he said in an interview. (See MNI: Big UK Fiscal Consolidation Needed To Meet Rules - IFS)

While such a move would "certainly disincentivise saving in a pension," it is unclear whether people would instead use other savings vehicles such as tax-free ISA accounts or increase consumption, he said.

The government should not aim to boost consumption through changes to tax relief, anyway, Delestre said, despite the drag on the economy from the UK’s currently elevated savings rate.

"It's an argument that applies to very specific circumstances where, for instance, you have a demand deficient recession. That's not the situation we're in right now. So I don't think there's a good argument for government looking to artificially stimulate upfront consumption." (See MNI INTERVIEW: UK Consumer Savings Still Drag on Economy- ONS)

Tax relief on pension contributions also offers equitable treatment to people with more volatile incomes, who are penalised by an annual progressive income tax, he said. Under the current system, equivalent pension withdrawals are taxed equally regardless of when the original contributions were made.

OTHER TAX OPTIONS

Delestre repeated the call in the IFS “Green Budget” to reform property taxes, noting that HMRC believes that any increase to stamp duty would be revenue-negative. 

Stamp duty is currently greatly distortive, he said, as it prevents people from undertaking an otherwise mutually beneficial exchange. It creates an "unnecessary additional distortion where people end up consuming something that they don't really want to be consuming," by preventing people from moving into more appropriate homes. (See MNI: Big UK Fiscal Consolidation Needed To Meet Rules - IFS)

Addressing a proposal to roll NICs into income tax, Delestre said that "there is a very good case for having a single income tax that applies to all types of income uniformly." 

Although there are still nominal ways in which NICs qualifies people for the full state pension, it has lost much of its historical strong contributory element, he said.